www.msnbc.msn.com/id/8873875
Eye on the E conomy Central bank raises rates another quarter-point With economy growing briskly, Fed indicates more increases highly likely Rate chart The Fed has raised the benchmark overnight lending rate ten times since J une 2004, when it stood at 1 percent.
Profile E-mail The Federal Reserve raised short-term interest rates a quarter-point for the 10th time in 14 months Tuesday and indicated that more rate hikes ar e likely because of inflation pressures stemming from the briskly growin g economy. As widely expected, Fed Chairman Alan Greenspan and his fellow policy-mak ers raised the benchmark overnight lending rate to 35 percent, compared with a 46-year low of 1 percent in June 2004 when the Fed began raising rates. Major commercial banks quickly followed by raising the prime rat e for the most creditworthy businesses and consumers to 65 percent. The Fed repeated language it has used consistently over the past year to signal further rate hikes, supporting the case of analysts who expect th e central bank to continue tightening credit at the same steady pace, br inging the overnight rate to at least 4 percent by the end of the year. "The end of the tunnel is not in sight," said Ethan Harris, chief US ec onomist for Lehman Bros. "Core inflation has been relatively low in r ecent months and longer-term inflation expectations remain well containe d, but pressures on inflation have stayed elevated." The statement went on to say that "policy accommodation can be removed at a pace that is likely to be measured," language that in the past has si gnaled quarter-point rate hikes.
Bush upbeat about economy The steady string of quarter-point moves, which have become almost routin e, is unprecedented in the recent history of the Federal Reserve. In the past, rapidly changing economic conditions have forced the central bank to respond more aggressively by making moves of a half-point or more, o r by making "extra" moves between scheduled meeting of policy-makers. This time around, Fed Chairman Alan Greenspan and his colleagues have bee n able to stick to their word by raising rates in a "measured" fashion, moving exactly a quarter-point at each of the past 10 consecutive schedu led meetings. There are two more meetings this year, and many analysts now expect the c ycle to continue into 2006, even after Greenspan, 79, retires after 18 y ears in his immensely powerful post. Greenspan's term ends in January an d he is not eligible to be reappointed. Goldman Sachs, for example, this week raised its interest rate projection s, forecasting that the Fed will raise the overnight rate to 5 percent b y mid-2006, up from a previous forecast of 45 percent. Rich Yamarone, d irector of economic research for Argus Research, set a target of 525 pe rcent and noted that Fed officials have suggested that even a half-point rate hike would still be considered "measured." "At this point in time I guess they have got to have something pretty dra matic to stop them - either a sharp deceleration in inflation or a sharp deceleration in growth," said Diane Swonk, chief economist of Mesirow F inancial in Chicago.
Employers added 207,000 jobs last month, enough to absorb new workers and draw some in from the sidelines, keeping the unemployment r ate steady at 5 percent. On the inflation front, signs are a bit more mixed, with the latest repor ts showing that inflation was a bit above the Fed's target late last yea r but has declined a bit since then. Many economists have been surprised that the steady increase in oil and gasoline prices to record levels ha s not yet had more impact on either inflation or growth. "The bottom line is we haven't played through all the lags yet," said Swo nk. One major uncertainty has begun to resolve itself as long-term interest r ates set on the international bond market have begun to rise in tandem w ith short-term rates.
That could help cool the red-hot housing market, which has set off some a larms among policy-makers and analysts who fear the rapid unwinding of a n asset bubble could cause a sharp slowdown in overall growth. "With the household sector dependent on housing wealth to sustain consume r spending, it should only take a relatively modest rise in long-term ra tes to take the steam out of the housing sector and for this to lead to a significant slowing in consumer spending," Goldman Sachs chief economi st said in a note to clients Monday. When that happens, sometime in the next six to 12 months, consumer spendi ng growth will likely slow, putting an end to the Fed's rate-hike cycle, he said.
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