US Fed expected to hike rate in Dec.

The Federal Reserve will raise the interest-rate target for overnight loans between banks by a quarter point to 2.25 per cent next month to head off inflation, said 20 of the 22 largest bond-trading firms.

The number of primary dealers of US Government securities who anticipate a rate increase jumped after employment, retail sales and consumer prices in October exceeded forecasts. Only six dealers last month forecast an increase in the federal funds target at the central bank's December 14 meeting.

"I threw in the towel when I saw the inflation numbers," said Michael Moran, chief economist at Daiwa Securities America Inc in New York. "You put those three things together good employment, strong retail sales activity and stirring inflation and it seems like a situation where the Fed should be moving again."

Citigroup Inc, Bear Stearns & Co and Lehman Brothers Holdings Inc are among the 14 dealers that joined Daiwa in changing their forecasts.

Merrill Lynch & Co, the world's largest securities firm by capital, is calling for no increase next month. Dresdner Kleinwort Wasserstein declined to participate. The firm, which last month expected a 2 per cent year-end target rate, will release its new estimate on November 26, said Kevin Logan, senior market economist in New York.

A higher fed funds rate may lead to an increase in borrowing costs on consumer and business loans and mortgages. On the day of the Fed's last increase, November 10, Citigroup, JPMorgan Chase & Co and Bank of America Corp, the three biggest US banks, raised their prime lending rates to 5 per cent.

In the past two decades, the Fed raised rates in December just twice, in 1988 and 1986. It has cut them in December seven times since 1984, most recently in 2001.

"October's data were sufficiently strong to convince us that the Fed was not going to skip the December meeting unless the November employment data were weak, which seems unlikely," said John Ryding, chief US economist at Bear Stearns in New York.

The Labour Department will probably say on December 3 that the economy added 200,000 non-agricultural jobs this month, according to the median estimate of 19 economists surveyed by Bloomberg News.

Fed policy-makers have lifted the benchmark rate a quarter percentage point at each of their past four meetings, from a four-decade low of 1 per cent in June. They issued a statement on November 10 saying "accommodation" in monetary policy can continue to be removed at a "measured" pace.

Interest-rate futures showed traders were pricing in about a 40 per cent chance of an increase next month until the Labour Department said on November 5 337,000 jobs were created in October, the most since March and almost double the median forecast of economists polled by Bloomberg News.

A week later the Commerce Department said retail sales excluding autos rose 0.9 per cent, the most since May.

By the time another Labour Department report on November 17 showed consumer prices rose 0.6 per cent in October, matching the biggest increase since 2001, futures traders put the odds of a rate increase next month at more than 80 per cent. Consumer prices the broadest measure of inflation rose 3.2 per cent from a year earlier, above the 10-year average of 2.4 per cent.

Most dealers that were forecasting no Fed rate increase in December cited a surge in oil to a record US$55.67 a barrel in October. They speculated that rising energy costs would crimp consumer spending, which accounts for two-thirds of the economy.

Crude oil for December delivery has since fallen back, to US$48.94 a barrel on Tuesday on the New York Mercantile Exchange.

"The economy seems to be growing at a healthy pace despite the earlier rise in oil prices," said Mickey Levy, chief economist at Bank of America in New York.

A month ago, BNP Paribas Securities Corp, Barclays Capital Inc, Goldman, Sachs & Co, JPMorgan, Mizuho Securities USA Inc and RBS Greenwich Capital forecast a December rise. Enditem

Source: China Daily