Economic & Business Focus: The Future of Free Money

If you think your business will need to borrow in the near future, borrow now.

The Federal Reserve has held the federal funds rate at the "emergency" level of 1 percent -- a 50-year low -- since June 2003 and has repeatedly signaled that it will not rush to raise rates. However, the business community is palpably nervous about the possibility of sudden, substantial hikes. History suggests that the Fed will not raise rates in the months leading up to the November elections, but many economists believe a rate hike will occur either this summer or immediately following the elections.

"The Fed is content to maintain the status quo until a broader recovery, including job creation, is evident," says Robert C. Greving, executive vice president and CFO of UnumProvident Corp., an insurance provider in Chattanooga, Tenn. He believes rates will rise when second-quarter key indicators become available. "I expect the Fed to raise rates by 25 basis points at that time and another 25 basis points later in the year, as the recovery is confirmed."

Scott J. Brown, chief economist and senior vice president of equity research at Raymond James & Associates Inc. in St. Petersburg, Fla., expects the Fed to leave the federal funds rate at 1 percent through midyear. He puts the 10-year Treasury at about 4.5 percent in June and thinks the federal funds rate will hit 2 percent and the 10-year Treasury will rise to 4.8 percent by December. Brown sees the federal funds rate moving to 2.5 percent and the 10-year note reaching 4.9 percent in early 2005. Job growth will be the key factor in the Fed's timing. "I'm guessing rate hikes will start in August or September, but that will depend largely on job growth," he says.

At Morgan Asset Management, an affiliate of Regions Financial Corp. in Birmingham, Ala., "we expect interest rates to remain relatively range-bound through the end of the second quarter, with no real conviction in either direction," says John Norris, chief economist and senior fund manager. "By the end of the year, with the election behind us and the economic and fiscal picture becoming increasingly clear, interest rates will likely head back up, possibly 50 basis points or so," he says. He expects the 10-year Treasury to be between 4.5 percent and 4.75 percent by year-end. "As for 2005, we feel as though the trend for higher interest rates will remain firmly in place," he says. "A lot can happen between now and then, but a move in the 10-year note to more than 5 percent would definitely be in order if we don't have too many extraneous events."