WASHINGTON (AFP) - With little doubt about the Federal Reserve's plans for a quarter-point rate hike, financial markets were focusing on another question: When will the Fed stop?
Based on signals from central bank officials, economists say the Federal Open Market Committee, which meets Tuesday, is almost certain to make its third rate hike since June 30, boosting the federal funds rate to 1.75 percent.
"It's been a pretty well-telegraphed policy over the past few months," said Tim McGee, chief economist at US Trust Corp.
But observers say Fed chairman Alan Greenspan and his colleagues, who have pledged a "measured" effort to bring up interest rates from their lowest levels in decades, must think hard before taking base rates up much higher.
David Rosenberg, chief North American economist at Merrill Lynch, said the Fed is moving to get base rates up to two perent as part of a "normalization" of rates, but that the economy is still too fragile for a series of steep increases.
"Our two percent peak forecast for Fed funds has taken a lot of folks by surprise, but ... does anyone really believe that a 300-400 basis-point Fed tightening cycle wouldn't generate a recession?"
Greenspan has argued that the economy is gaining traction after a "soft patch," but some argue that the recovery is still fragile and could be choked off by a number of factors, including higher rates.
Sung Won Sohn, chief economist at Wells Fargo, said he sees a "two-stage" effort to get the federal funds rate to about four percent, as the central bank removes the stimulus it had been injecting in recent years.
"Now that the economy is growing, the FOMC is getting ready to tackle inflation if it becomes a problem in 2005," he said.
"The Federal Reserve wants to reach the neutral interest rate where it neither helps nor hurts the economy by the end of 2005. Most economists believe it is in the 3.0 to 5.0 percent range given current and expected economic conditions."
The debate is open among economist about whether the Fed will pause at one or both of its next two meetinfs, November 10 and December 14.
"There is increasing speculation that if the economic data doesn't show some more strength, they might stop raising rates. Some people think they may stop at this (September) one," McGee said.
"There are periods they may pause and there will be periods they accelerate the process, but I think broadly speaking we should expect to see rate hikes throughout all of '05 into '06," said Mark Zandi, chief economist at Economy.com.
"December is now the most likely date for a pause," said Avery Shenfeld, an economist for CIBC World Markets.
Economists differ on whether this pause will last based on their views on the economy.
Those who think the economy will struggle believe the pause could last, while those who think the economy is on firm footing expect rate hikes to quickly resume in February.
This split is reflected in the market, with the futures market showing a 50-50 split over the odds of a rate hike in February.
Shenfeld, for one, said the pause could last several quarters because it will be clear by December that growth will be disappointing.
"I expect to see the fourth quarter softer again. Once we're through these clear-out sales of cars and other items, we'll return to a slower pace for consumer spending," he said.
But Zandi said that it would take a serious slowdown to keep the Fed from tightening.
"The hurdle for them not to continue on this measured path is quite high," Zandi said.