Don’t look for rates in the U.S. to rise any time soon, says a report by TD Bank Financial Group.

The report, by Craig Alexander and Gillian Manning, notes there has been speculation, in light of the robust performance by the U.S. economy, about when the U.S. Federal Reserve will begin hiking interest rates.

The report notes that the Fed may well drop the reference that rates can be left at current levels for a ‘considerable’ period of time at the Dec. 9 meeting of the Federal Open Market Committee, which would only add to expectations for a near-term tightening in monetary policy.

But it adds: “While there is no question that the next move in U.S. rates is up, the timing may be slower than some expect. The futures market has priced in the possibility of a rate increase as early as March 2004. In our opinion, this is too aggressive.”


Alexander and Manning say they expect by the second half of 2004, evidence that the economic expansion is well entrenched will probably prompt the Fed to begin raising rates. The November Presidential election may also factor in to the timetable, so as to send a message that the rate hikes are not politically motivated.
“Overall, we expect the fed funds rate to be raised by 50 basis points in the third quarter of 2004 and a further 50 basis points in the fourth quarter.”

“This may cause some to fret about the fallout from the tightening in monetary policy, but these concerns will be unfounded. In the first place, lowering the Fed funds rate to 1% was a drastic measure, undertaken to stem disinflationary pressures.

“Second, even with 100 basis points of rate hikes, monetary policy will still be extremely stimulative. Indeed, with a modest acceleration in inflation by the end of 2004, real interest rates will be only slightly higher than current levels.

The report says the challenge is to differentiate between the direction of interest rates and the level of interest rates, recognizing that the latter is what matters most for the performance of the economy. “Since the Fed has a good communication track record, there is every reason to believe that the central bankers will be successful in getting this message across,” the report says.