Federal Reserve Chairman Alan Greenspan is insistent on taking a measured approach to keeping inflation under control, which will likely result in the central bank raising interest rates by one-quarter point four more times this year, predicts Doug Duncan, chief economist for the Mortgage Bankers Association.

If that occurs, the current fed funds target rate of 2.5% will rise to 3.5% by the end of 2005. “I think the Fed is looking at inflation and saying, ‘We’ve got it right where we want it to be,’” and is determined to keep it in check, Duncan told several hundred mortgage bankers gathered at the Manchester Hyatt on Tuesday. His remarks came during a keynote address on the state of the U.S. economy. To Duncan’s point about containing inflation, the core Consumer Price Index (CPI) — which excludes food and energy — is currently growing at an annualized rate of about 1.5%, a moderate pace by all accounts.

The 10-year Treasury yield — the benchmark for long-term, fixed-rate financing in commercial real estate — will rise to 4.75% by the end of the year, Duncan predicts. Such a gradual increase in the 10-year yield would likely be well received by the mortgage banking community, which has expressed surprise that the 10-year yield hasn’t already reached 5%. At the close of business day Tuesday, the 10-year yield registered 4.04%, which mortgage bankers describe as incredibly low.

MBA’s chief economist anticipates strong economic growth of 3.5% or better in 2005. On the employment front, Duncan expects non-farm payrolls to increase by 180,000 monthly for the balance of the year, building to 200,000 monthly in 2006 as the rate of worker productivity gains begins to slow somewhat.

While those job growth figures are showing positive momentum, employment has repeatedly fallen short of economists’ expectations. In January 2005, for example, the Labor Department reported an increase of 146,000 in non-farm payroll jobs. Economists had projected 200,000. Duncan attempted to explain why the pace of job gains hasn’t met expectations over the past few years.

“Macro economic forecasting is a little like driving a car by looking at the rear-view mirror,” said Duncan. “What that means is a model can’t predict something where there is no previous similar pattern.”

Translation: Over a three-year period the rate of worker productivity across all business segments grew at an average of 4.1%, exceeding real GDP growth. That had never happened before, emphasized Duncan. “Consequently, all macro-economic forecasters, including ourselves, overestimated the pace of job growth because these tremendous gains in productivity delayed the onset of hiring past what would have been a typical ramp-up of hiring in a typical post-recession recovery.”