WASHINGTON (AFP) - The discovery of life in the American jobs market may keep the Federal Reserve raising interest rates until the end of 2004, analysts said.
Economists said a quarter-point rise in the federal funds target rate -- to 2.0 percent from 1.75 percent -- was a done deal for the next Federal Reserve policymakers' meeting.
US Federal Reserve chairman Alan Greenspan and his colleagues gather Wednesday to ponder the outlook for interest rates. A statement explaining the decision is due about 2.15 pm (1915 GMT).
The big question is when a series of rate increases, which has lifted the federal funds target rate to 1.75 percent from an "embarrassingly low" 1.0 percent -- will come to a halt.
Mounting speculation of a pause in December was curtailed by a government report Friday showing the US labor market apparently escaped a quagmire in October.
The US economy churned out a seven-month record of 337,000 jobs in the month, far more than predicted by Wall Street, it said.
The news was sure to comfort the central bank about the underlying strength of the economy, enabling it to tighten interest rates without fear of stalling economic activity, analysts said.
"The debate around Fed policy is not this week's meeting but the December meeting: Will the Fed pause or continue its march to 'neutral'?" said Lehman Brothers analyst Ethan Harris.
"Clearly the strong payroll report increases the odds of a December rate hike," he added.
"However, both the overall data flow and Fed rhetoric argue that the Fed is entering a new data dependent phase."
Harris suggested the US economy had slowed to a pace in line with its long-term trend.
The US economy expanded at a slower-than-expected 3.7 percent annual pace in the third quarter of 2004, latest data show. It represented an acceleration, however, from 3.3 percent in the second quarter.
"Looking ahead, the economy is more likely to slow further than to re-accelerate," Harris argued.
"Unless oil prices fall sharply, the oil shock will continue to weigh on growth in the next several quarters and the stimulus from 0 percent loans, cash-out mortgage refinancing and last year's tax cut will continue to fade," he warned.
"The economy continues to behave as though it needs unusually easy credit conditions just to achieve trend-like growth."
John Lonski, chief economist at Moody's Investors Service, agreed that a rate rise was inevitable this week.
"The Fed will definitely hike rates at the next November 10 meeting of the FOMC (Federal Open Market Committee), and if we have another solid gain by payrolls in November the Fed will be hiking rates again," he predicted.
"This much better-than-expected reading on payrolls for the month of October suggests that the federal funds rate ends 2004 at 2.25 percent."
Banc One chief economist Diane Swonk said the jobs rebound had swung the chances of a December increase from about even to modestly in favor.
But the Federal Reserve would be more willing to take a break in 2005, she forecast.
"Once they pass the two percent threshhold -- not that that is by any means a target -- it gets them back into more respectable territory relative to their peers abroad," Swonk said.
"One of the issues facing the Fed right now is that rates are almost embarrassingly low."
11/06/2004 - 19:20 GMT - AFP