Fed Raises Interest Rates for 17th Consecutive Time
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WASHINGTON (AP) – The Federal Reserve on Thursday raised a key interest rate for the 17th consecutive time but signaled that any further rate hikes would depend on economic developments.
The central bank boosted the federal funds rate, the interest that banks charge each other, by a quarter-point to 5.25 percent, the highest level in more than five years. When the Fed started its credit tightening campaign two years ago, the funds rate stood at a 46-year low of 1 percent.
In the statement explaining the decision, Fed Chairman Ben Bernanke and his colleagues said that “the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
Wall Street, which had been worried that the central bank could overdo its credit tightening, soared on the Fed’s comments, believing that the central bank is at least considering a pause in its two-year credit tightening campaign.
The Dow Jones industrial average, which was up about 80 points before the mid-afternoon announcement, surged another 80 points.
“There is a sense that another rate hike by the Fed won’t be automatic. This is a relief rally,” said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.
Jones said the wording of the statement gave a hint of a split on the Federal Open Market Committee, the panel of Fed board members and regional bank presidents, who meet eight times a year to set interest rate policy.
Jones said one camp is concerned that the jump in energy prices this year could be adding to inflation pressures while another group believes the Fed is running the risk of tightening too much and causing a more severe economic slowdown.
The committee said that “some inflation risks remain” even though it was likely that a moderation in economic growth “should help to limit inflation pressures over time.”
The Fed’s rate hikes have raised the borrowing costs for millions of Americans on everything from home mortgages to auto loans.
Commercial banks were expected to quickly follow the Fed announcement by raising their benchmark prime rate by a quarter-point to a five-year high of 8.25 percent.
The latest rate hike had been widely expected, given comments Bernanke made on June 5 in which he called a rise in the rate of inflation an “unwelcome” development, a comment that contributed to a one-day 199-point drop in the Dow Jones industrial average.
Bernanke, a former Princeton economics professor and chief economist for the Bush White House, took over for venerable Fed Chairman Alan Greenspan on Feb. 1. Bernanke’s first five months on the job have seen some rocky times as he has alternately sent markets soaring or plunging based on his comments.
Some economists have complained that Bernanke, in an effort to be more open about the Fed’s thinking, is actually increasing confusion.
In its statement explaining Thursday’s action, the Fed noted that recent indicators suggest that “economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”
But at the same time, the statement said that “readings on core inflation have been elevated in recent months.”
Analysts said the Fed could raise rates for an 18th time at the Aug. 8 meeting if those inflation reading continue to be above the Fed’s comfort zone and the economy has not shown further signs of slowing.
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