WASHINGTON -- Expect higher interest rates from the Federal Reserve in the months ahead. It's more of a mystery whether policy-makers will extend their 18-month credit-tightening campaign beyond Alan Greenspan's tenure.
The central bank gradually has increased rates for 18 months to control inflation. At Tuesday's meeting, the Fed is expected to add one-quarter of a percentage point to an important short-term interest rate, known as the federal funds rate.
That would mark the 13th such increase since June 2004 and would put the rate at 4.25 percent, the highest in more than four years.
Economists are divided about what will happen after that, saying the Fed could:
- Boost rates by one-quarter of a percentage point at its next meeting, on Jan. 31, and then stop.
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- Vote for an increase in both January and at the following meeting, on March 28, and then move to the sidelines.
- Commit to the campaign until the funds rate, the interest banks charge each other on overnight loans, reaches 5 percent.
"There is short-term certainty and medium-term mystery for the Fed," said Carl Tannenbaum, chief economist at LaSalle Bank, who is in the 5 percent camp.
The Fed has nudged up the funds rate in an effort to keep the economy on an even keel and inflation in check.
Changes to this rate influence a range of interest rates for consumers and businesses.
If the Fed acts as expected on Tuesday, the prime lending rate -- for certain credit cards, home equity lines of credit and other loans -- would increase to 7.25 percent, the highest in more than four years.
The January meeting will be Greenspan's last. Ben Bernanke, the White House's chief economist, is President Bush's choice to succeed Greenspan.
Bernanke is expected take over Feb. 1, after Senate confirmation, and preside over his first meeting as Fed chief in March.
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The changing of the economic guard at the Fed raises some uncertainties in terms of economists' outlook for interest rates.
But there also is the challenge of accurately predicting how the economy will fare, months from now, on employment, production and inflation. That is what Fed policymakers must do when they make interest-rate decisions.
Economic barometers recently have shown positive signs:
- The economy grew at an energetic 4.3 percent in the third quarter, from July through September, despite the ill effects from the Gulf Coast hurricanes.
- Growth is expected to be solid in the current October-December period.
- Employment rebounded in November after a two-month lull, with payrolls expanding by 215,000.
- Inflation, excluding energy and food prices, appears to be fairly well-behaved.
Yet there are concerns.
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Economists worry that inflation could pick up, especially given record-high natural gas prices. Others fret that a sharper-than-anticipated slowdown in the housing market could drag down overall economic activity.
