BMA: Fed-speak may become clearer in 2006.

Leading Wall Street economists, who are members of the Bond Market Association's Economic Advisory Committee, expect the U.S. economy to continue growing in 2006 at roughly the same rate it has this year.

The median response to the Association's semi-annual economic survey calls for the nation's gross domestic product to rise 3.6% next year.

"A combination of expansionary fiscal policy, low interest rates, favorable financial conditions, high productivity growth and falling energy prices are all contributing to continued expansion," said Michael Decker, senior vice president and head of policy and research at the Association.

The committee expects a close to double digit increase in capital spending to lead next year's economic growth, along with moderately higher consumer spending.

According to the median forecast, business capital investment is expected to increase 8.9 percent for full-year 2005 and continue its robust pace with an 8.6 percent increase in 2006. Consumer spending is forecast to increase by 3.5 percent in 2005 and grow 2.9 percent in 2006, when spending is likely to be driven more by employment and in-come gains than low interest rates and housing price appreciation.

"The U.S. economy is well positioned to continue growing," said Robert DiCiemente, chairman of the Advisory Committee and head of U.S. economic and market analysis at Citigroup. "Business is benefiting from good demand, low interest rates and strong profits, while consumers have been buoyed by a revived job market and continued gains in wealth and incomes."

The median forecast has the yield on the 10-year Treasury note rising at a steady pace to 4.73 percent at the end of March and 4.90 percent at the end of June, ending 2006 at 4.93 percent.

The strong consensus view is that the Federal Reserve will raise the target Fed funds rate 25 basis points at the December 13 FOMC meeting. The median survey forecast projects the Fed funds rate reaching 4.75 percent in June and staying at that level through year-end. The threat of higher inflation is a prominent, if not dominant, concern in the markets.

The consensus among the panelists is that the consumer price index, or CPI, will rise 3.4 percent in 2005 and then decline slightly to 2.9 percent in 2006, reflecting the effect of energy price trends over the past year. Rising labor costs, a potential ability to pass along price increases, and capacity bottlenecks could contribute to a higher rise in the CPI, although relatively low inflation expectations and confidence in Fed policy will help anchor wage and price setting patterns.

Global competition is also likely to keep the impact muted. So-called core inflation is expected to be similar in 2005 and 2006, forecast at 2.2 and 2.3 percent, respectively.

"Energy prices were cited as the dominant risk to the outlook for GDP growth and inflation forecasts, as continued declines in oil prices would spur growth but price hikes would slow spending activity at the consumer and business levels," said Mr. Decker. "Other risks include sharp declines in housing prices and the resulting effect on consumer spending, accelerated inflation, and economic weakness outside the U.S."

Housing prices are expected to continue to rise, although at a slower pace than in previous years. While some Northeast and West Coast markets may see lower home prices at least on a real inflation-adjusted basis, the higher interest rate environment should have a muted impact on housing as long as the higher rates are the result of stronger income and job gains.

Total housing sales (new and existing) will maintain their record pace in 2005, at 8.4 million units, and then dip to 7.8 million units in 2006.

Slightly over half the panelists expect a change in the Fed's communication style under new Chairman Ben Bernanke, with most expecting a continued trend towards transparency and some also anticipating more clarity from Fed statements.

Among those expecting a change in style, 60 percent do not expect the change to affect market volatility, while the remaining 40 percent foresee an increase in volatility. Slightly over half of the respondents expect the Fed to set explicit inflation targets.

A majority is not in favor of these targets, noting that the Fed already has price stability as a goal and has implied a "comfort zone" for core inflation, while the remaining 39 percent point to the benefits in terms of Fed policy transparency. Most panelists, however, did not believe a shift to an explicit target would have a material effect on policy.