Factors to consider

Ethan Harris, chief U.S. economist at Lehman Brothers, pointed to three conditions that must occur for the Fed to halt its current tightening cycle.

First, Harris says signs financial conditions are tightening must emerge. He specifically points to the housing market. “By spring it should be clear the housing boom has ended,” he says.

Second, Harris says the Fed must believe the economy is slowing down a bit. Looking ahead, economists do expect a moderate slowing. While Harris forecasted a gross domestic product (GDP) figure of 3.5 percent for the first quarter of 2006, he expects growth to slow to around 2.5 percent for the remaining three quarters of next year.

Northern Trust’s Kasriel also expects a modest slowdown in the U.S. economy next year. Kasriel forecasts a 3-percent GDP measure for the fourth quarter of 2006 vs. 3.3 percent for the same period in 2005.

Finally, Harris says, the Fed must believe inflation is under control in order to halt the recent series of rate hikes. Recent verbiage from the FOMC hasn’t hinted an end to rate hikes is imminent. But economists will be watching for changes in the wording of the FOMC minutes and monitoring growth and inflation reports closely in the weeks and months ahead.