NU Online News Service, Jan. 29, 2004, 1:35 p.m. EST – The yield on the 10-year Treasury note could reach 5% by the end of the year.[@@]

That’s the assessment of Kurt Karl, an economist at Swiss Re America Holding Corp., New York.

The Fed Reserve Board agreed Wednesday to hold the target federal funds rate, one of the rates it controls directly, at 1%.

But, by dropping the phrase “a considerable period” from its reference to its current policy, the Fed hinted that it might start raising rates sooner than investors had been expecting, Karl says in a commentary. He says the federal funds target rate could rise to 2% by the end of the year.

The yield on the 10-year Treasury note could continue to hover between 4% and 4.5% as long as the federal funds rate holds steady, but an increase in the federal funds rate would push up the yield on 10-year notes, Karl says.

Karl also allows for the possibility that businesses could hold down inflation, despite commodity price increases, by continuing to wring more productivity from their operations. In that case, the Fed could keep the federal funds rate at 1.0% for the rest of the year, Karl says.