Which Way Will The Fed Move In 2007?

No one seems to be predicting any change in Fed monetary policy ahead of Tuesday’s meeting. But the central bank has its eye on inflation, so if conditions are right, that could mean a rate hike in 2007. Of course, what conditions will prevail as we move into the new year change from analyst to analyst. Sue Herera had two economists on “Power Lunch” today who both expect a Fed move later next year. The only question is, in which direction?

According to Steve East of FBR, the Fed will be on inflation watch for the first half of 2007. But come June, he says, overall growth will only be at 2% and there will be a year’s worth of GDP that’s below potential. At that point, Bernanke and gang will start to ease up on rates – and may make two in the last six months.

Bruce Kasman doesn’t “expect much of anything” for tomorrow’s Fed meeting. And like East, he sees inflation as the Fed’s main concern for the next few months. But when summer rolls around, expect a tightening, he says. Labor costs will be high relative to the Fed’s expectations for inflation, the U.S. dollar will be down, and growth will be back to 3% in the next few months.

Kasman says that as long as the economy grows according to his analysis, then inflation will be an issue six to nine months down the line.