View Full Version : Fed Boosts Interest Rate to 4.75 Percent

03-29-2006, 10:38 AM
Fed Boosts Interest Rate to 4.75 Percent
AP Online via NewsEdge Corporation :

WASHINGTON_The Federal Reserve on Tuesday boosted a key interest rate to the highest level in five years as new Chairman Ben Bernanke followed the Alan Greenspan inflation-fighting formula.

The action, the 15th consecutive quarter-point move, left the federal funds rate at 4.75 percent, its highest level since April 2001.

Fed officials, who were holding their first interest rate meeting under Bernanke, left the door open for further rate increases although private economists believe only one or two more rate hikes are likely.

The quarter-point rate hike had been widely expected. Bernanke has emphasized since being chosen by President Bush that he planned to continue Greenspan's approach toward setting interest rates. That approach was characterized by baby steps aimed at giving markets and investors plenty of time to adjust.

"Mr. Bernanke has chosen incrementalism over radical change in his first meeting," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a consulting firm.

"There is no fundamental change from Mr. Greenspan," said David Jones, chief economist at DMJ Advisors, another firm.

Jones said the only small difference was in an expanded paragraph that went into greater detail about the Fed's views on how the economy is performing.

The Fed said economic growth had "rebounded strongly" and the run-up in the price of energy and other commodities had had only a "modest effect on core inflation."

Jones predicted the Fed would raise rates one more time to 5 percent and then stop.

On Wall Street, investors pushed stocks lower following the Fed announcement, expressing disappointment that the central bank did not send a stronger signal that the rate hikes would be ending soon.

The Fed's latest move will mean higher interest rates for both consumers and businesses. KeyCorp was the first bank to announce it was raising its prime lending rate by a similar quarter-point to 7.75 percent. The prime is the benchmark for millions of business and consumer loans.

In its statement, the Fed sounded at an upbeat note about the current business climate, saying "economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace."

The statement retained language used last time that "some further policy firming may be needed." That was seen by financial markets as a signal that further rate hikes could occur.

When the central bank began tightening credit conditions in June 2004, the prime rate stood at 4 percent and the federal funds rate was at 1 percent, both the lowest levels since the late 1950s when Dwight D. Eisenhower was president.

Those unusually low levels were reached as the central bank beginning in 2001 worked to protect the economy from the blows dealt by a bursting stock market bubble, the 2001 recession, terrorist attacks and a prolonged period of job losses even after the economy began to recover in November of that year.

The Fed's goal has been to reach a point where interest rates are neither stimulating nor depressing economic growth.

Many analysts believe the Fed is very close to that level but may feel the need to push the funds rate up one more time to 5 percent from moving to the sidelines for the rest of the year.

However, other analysts who are more worried about inflation pressures say the Fed may feel the need to boost rates not only at the next meeting on May 10 but also at perhaps two more meetings after that, leaving the funds rate at 5.5 percent.

Greenspan retired after 18 1/2 years at the Fed. Bernanke was nominated by Bush to succeed him. Bernanke had been an economics professor at Princeton specializing in monetary policy before serving as a Fed board member from 2002 to 2005 when Bush tapped him to be chairman of the White House Council of Economic Advisers.

<font color="blue">All that has happened is that Bush has padded the Fed with people that are willing to continue with this nonsense. They won't stop until the rates are at 5.5% - maybe 6. This will come during the 2008 campaign, and I can guarantee you that if there is a republican successor, the rates will start to drop back down to 4.5%. If a democrat is elected they will stall the drop - Its just typical FRB political maneuvering. All that Bernanke has done is shown where his loyalty is. Bush has also recently appointed an inexperienced former financial advisor Kevin M. Warsh to the Federal Reserve Board. They will obviously be molding this guy to be Bernanke's successor at some point in the future. Bush's recent appointments to the FRB will be felt for a long time to come.</font color>

Debra Li