Most observers expect the Federal Reserve to keep short-term interest rates steady when the central bank’s rate-setting committee meets Jan. 30 and 31.

If those forecasts are correct, the prime rate will remain 8.25 percent, and consumers with variable-rate credit cards and home equity lines of credit won’t need to worry about rate increases.

There’s also little hope for a rate cut — not at this month’s meeting, and not anytime soon. At the Chicago Board of Trade’s futures market, traders have priced in a 4 percent chance that the Fed will cut the federal funds rate at this meeting, and a 96 percent chance that the central bank will hold steady. Futures traders have priced in low probabilities of rate cuts anytime in the first half of this year, and they figure about a 22 percent chance of a quarter-point decrease by Halloween.

Some economists and financial analysts have predicted that the Fed will keep short-term rates unchanged through the end of this year.

Interest rates’ fall and rise
After the recession of 2001 and the Sept. 11 attacks that year, the Fed went on a long rate-cutting campaign to stimulate the economy and ease fears that the banking system would run low on cash. The federal funds rate, which is what banks charge one another for overnight loans to cover reserves, fell to 1 percent and remained there for a year.

Then, in June 2004, the Fed raised rates a quarter of a percentage point, and did it again and again — raising rates 17 meetings in a row, a quarter of a point at a time. The Fed’s rate-setting panel, called the Open Market Committee, meets eight times a year, roughly every six weeks. The rate-hike spree ended last June, with the federal funds rate at 5.25 percent and the prime rate at 8.25 percent. Members of the Open Market Committee pronounced themselves satisfied that they had achieved a neutral interest rate that was high enough to prevent inflation from getting out of control, but low enough to keep the economy from falling into a recession.

One dissenter
Well, make that “most” members of the rate-setting panel. One, Jeffrey Lacker, has consistently said that he thinks the federal funds rate is too low, and that the Fed risks courting inflation. Lacker is president of the Federal Reserve Bank of Richmond. In the past several FOMC meetings, he has cast the lone dissenting ballot, voting for a quarter-point rate increase while the other members of the committee voted to hold rates steady.

Despite the fact that the Fed’s sole dissenting voice was calling for a rate increase and not a decrease, and the fact that other members of the rate-setting committee said rate increases were more likely than rate cuts, investors got it into their heads last fall that the central bank would decrease the federal funds rate sometime this year, probably in the first half. Fed officials have striven this year to disabuse investors of this notion.

The latest to do this was Susan Schmidt Bies, a member of the Fed’s Board of Governors. In her public statements, she tends to express the Fed’s consensus, rather than any idiosyncratic hawkish or dovish positions. In a Jan. 18 speech in Tucson, she noted that inflation is above 2 percent — higher than the Fed would like to see — but that the rate seems to be falling slowly. “Nevertheless,” she said, “the risk to inflation continues to be on the upside until we see further confirmation in this trend toward moderation.”

That’s a succinct way of saying that the Fed isn’t going to cut short-term interest rates until the inflation rate dives under 2 percent and stays there for several months.