Bernanke, housing in spotlight as year begins

Two more rate hikes seem likely after a statement issued by the Fed this month said “some further measured policy firming is likely to be needed” to keep inflation pressures under control.

But some analysts suggest another scenario, saying that Greenspan could elect to leave rates unchanged Jan. 31 or raise the overnight federal funds rate a final quarter-point to 4.5 percent but declare that monetary policy is neutral, leaving a clear slate for his successor.

“It would be very, very easy for Greenspan to signal neutrality with the handoff,” said Michael Englund, chief economist for Action Economics. “It is still plausible the fed will stop at 4.5 percent, and in fact Bernanke will enter with a pause and have as his first order of business whether he will have to tighten again later in the year.”

Englund believes growth will be strong enough in 2005 that the Fed will have to resume hiking rates, eventually boosting the benchmark rate to 6 percent or more.

Rosenberg believes that would be disastrous, saying such rate hikes in the past have often pushed the economy into recession.

“I think the Fed is in the process of overshooting,” he said. “It’s always those last couple of rate hikes that tip the economy over. We could have either a soft landing or a hard landing. Or a soft landing in ’06 and a hard landing in ’07.”

About the panel This is the fourth annual installment of MSNBC.com's year-end economic roundtable. We poll selected Wall Street and academic forecasters for their views of the future and tabulate their previous forecasts to see how they did in the past. To read last year's discussion, click here.

The principle question for Fed policy-makers will be whether inflation pressures are building after more than four years of expansion, including a sudden surge to record high energy prices last year in the wake of Hurricane Katrina.

“If inflation does begin to move up a little faster than the Fed is comfortable with, they may have to keep raising rates even more into the summer or fall,” said Nariman Behravesh, chief economist for Global Insight. “That still doesn't look like a nasty scenario, but it would be a little slower.”

A more substantial inflation scare could send mortgage rates spiking higher and trigger the steep housing downturn that many fear. But Behravesh said even last year’s $3-a-gallon gasoline failed to spark much inflation in the broader economy.

“What we have learned over the last year and a half is that energy alone doesn’t do it,” he said.

Many Wall Street strategists are optimistic that the Fed will move to the sidelines quickly and help drive Wall Street higher after an uninspiring stock market performance in 2005.

Gary Thayer, chief economist of A.G. Edwards, cautiously backs that view.

“I think housing has been a preferred place to be while the Fed was raising rates,” he said. “When the Fed is finished equities will get more attention. I think next year could be as good as or better than this year. (But) we’re not at the beginning of the cycle, so there is not any undervaluation in price. We need to see a real change in sentiment to get a really good year in the stock market.”

And Thayer, who is optimistic about the economy next year, notes that investors have had plenty to worry about over the past year including a difficult war in Iraq, concern about terrorism, a wave of destructive hurricanes and soaring energy prices.

“If there is one thing we learned from 2005 it is that anything can happen at any time,” he said.

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