Is the Fed About to Hike Its Federal Fund Rates?

The recent release of minutes from the Federal Reserve’s March meeting may hint that the nation is experiencing a sustainable recovery and is possibly facing upwards inflationary pressure.  The yield on 10-year Treasury notes has already surpassed four percent for the first time since last June; oil and copper traded at their highest prices in 18 months.

With Labor Department data showing increased private-sector hiring (the fourth time in five months), some traders are betting that the Fed will have to raise its target federal-funds rates to 0.5 percent by November.  Even so, Fed Chairman Ben Bernanke doesn’t appear to be in a hurry to increase interest rates too quickly for fear of putting the brakes on the economic recovery at a time when the unemployment rate is hovering around 10 percent.  Job openings climbed in several sectors of the economy in February, including retail, manufacturing, transportation, restaurants and hotels, according to the Labor Department.

“In the market’s mind, the Fed is always about to hike,” said Ethan Harris, chief economist at Bank of America Merrill Lynch.  “But the Fed is in a very different mindset right now.”  Harris expects the Fed will raise its interest rate to one percent at the end of 2011.  Doug Roberts, chief investment strategist at Channel Capital Research, agrees.  “Concern with unemployment, which is expected to decrease slowly at best, indicates rates may remain low for much longer than people anticipate unless we get inflationary pressures,” Roberts said.