FOMC on autopilot for 10th straight rate hike

WASHINGTON (AFX) The FOMC is expected to hike rates by a quarter percentage point on Tuesday and stick closely to past statements about the economy. "The Fed looks to be on autopilot, set to raise rates a quarter point at every meeting until GDP growth is closer to 3 or the job market flags," said Avery Shenfeld, economist at CIBC World Markets in Toronto. But analysts are wondering whether the central bank might express some greater unease about the outlook for inflation. This would not so much indicate that the Fed was going to increase the size of its rate hikes, but that the duration of higher rates may be longer than the market now expects. The FOMC is expected to raise the Fed funds rate by a quarter percentage point to 3.5, the tenth straight meeting with a quarterpoint hike. The central bank's statement released following the meeting is seen repeating that rates remain accommodative, which can be removed at a "measured pace." Recent revisions show the Fed's favorite gauge of inflation, the core personal consumption expenditure index, has been generally higher over the past year than previously thought. "There may be a slightly more worried tone about inflation," said Josh Shapiro, chief U.S. economist at MFR Inc. There were hints in the minutes of the FOMC's June 29-30 meeting that Fed officials are divided into several camps about how high rates must go in the current tightening cycle, said Dan Seto, senior economist at Sumitomo Mitsui Asset Management, "I think the ongoing tension within the FOMC is the thing to watch," Seto said. But some economists said they were not expecting any significant changes to the Fed statement, "I don't think we'll get any statement changes only because they seem so unwilling to provide hints like that," said James Glassman, economist at JP/Morgan Chase.

Given the recent string of strong economic reports, including Friday's strong 207,000 increase in nonfarm payroll jobs in July, some economists see the Fed's steady rate hikes continuing through the middle of next year. Seto of Sumitomo said he sees the Fed funds rate reaching 5 by the middle of next year. Some economists are worried that the Fed might overshoot, hiking rates too much and slowing the economy. "I think the Fed is going to keep raising rates until it says 'oops'," said Robert Brusca, chief economist at FAO Economics. The key economic reports will come after the FOMC meeting, with the Commerce Department releasing the July retail sales data on Thursday and the June trade deficit on Friday. Economists surveyed by MarketWatch are expecting a 1.8 gain in July retail sales, just ahead of the 1.7 rise in June. It would be the strongest sales month since September 2004. The retail sales report will be released at 8:30 a.m. Eastern on Thursday. Excluding autos, sales are expected to be up 0.6, compared with a 0.7 rise in June. Sales of cars and trucks posted a 20millionunit annual pace in July, the highest since October 2001. The June trade deficit is expected to widen slightly to 56.9 billion from 55.3 billion in May. One lesser known report may get greater attention than usual on Tuesday before the Fed meeting, when the Labor Department releases its second-quarter productivity report, which includes an estimate for unit labor costs in the April-June quarter. Unit labor costs are expected to 3.0 rise, after rising 3.3 in the first quarter. Fed chief Alan Greenspan said the central bankers would be paying close attention to any increase in the costs of labor, which could be passed on to consumers in the form of higher prices