View Full Version : 12/13 - Fed Decision on rates at 2:15 ET

12-13-2005, 12:34 PM
<font color="red"> Fed Likely to Raise Rates a Quarter Point but Appears to Be Nearing End of Rate Increase Campaign </font>

WASHINGTON (AP) -- The Federal Reserve is expected to hike interest rates another quarter point today. But after 18 months in which the Fed has been pushing rates higher to keep inflation under control, the central bank appears to be getting close to the end of its rate increase campaign.

However, there is a divergence of opinion among economists on just when the rate increases will cease. One group thinks the Fed will stop after two more rate increases, while analysts who are more worried about inflation think the central bank could raise rates perhaps four more times.

There is no dispute, however, over what Federal Reserve Chairman Alan Greenspan and his colleagues will do at Tuesday's meeting. Expections are essentially universal that the Fed will increase the funds rate, the interest that banks charge each other, by a quarter point to 4.25 percent, the highest level since May 2001.

It would mark the 13th time the Fed has raised interest rates since it began tightening credit in June 2004 when the funds rate stood at a 46-year low of 1 percent.

"Another quarter-point rate hike is baked in the cake," said David Jones, chief economist at DMJ Advisors, a Colorado-based consulting firm. "But we are near the end."

Jones is in the camp that believes the Fed will boost the funds rate at Tuesday's meeting and then deliver one more quarter-point increase at Greenspan's final meeting on Jan. 31, leaving the funds rate at 4.5 percent.

But other economists argue that inflation pressures spawned by a surge in energy costs this year will prompt the central bank to keep pushing rates higher even after Greenspan leaves office.

They also believe that Ben Bernanke, who has been nominated by President Bush to succeed Greenspan, will want to quickly demonstrate his own inflation-fighting credentials.

For that reason, they are looking for Bernanke to keep pushing rates higher in small quarter-point increments at his first Fed meeting as chairman on March 28 and possibly a final move at the May 10 meeting.

That would leave the funds rate at 5 percent, a level that some economists believe the central bank may feel is needed to make sure that interest-rate sensitive sectors of the economy such as housing slow enough to keep inflation under control.

"The Fed is looking at an economy right now that is growing strongly with upside risks to inflation," said Lyle Gramley, a former Fed board member and currently senior economic adviser at Schwab Washington Research Group, a financial advisory firm.

Indeed, a variety of recent statistics have come in stronger than expected, depicting an economy that is rebounding after the blows delivered by a string of devastating hurricanes and a spike in energy prices.

Hints about the Fed's future intentions may come from the wording of Tuesday's statement explaining its latest action.

For all of the rate increases so far, that statement has said future increases will occur at a "pace that is likely to be measured," a phrase seen as a signal of quarter-point increases.

The statement has also described current policy as still accommodative, meaning interest rates are still low enough to spur economic growth. The Fed's goal has been to raise rates to a neutral level which is neither spurring growth nor holding it back.

The minutes of the Fed's last meeting on Nov. 1 showed that policymakers were discussing how the language should be changed, but some economists think that debate may go on a little longer before a consensus is reached.

"I think they are struggling with how to let markets know the rate hikes are coming to an end," said David Wyss, chief economist at Standard &amp; Poor's in New York. "The problem is that anything they say will get over-interpreted by financial markets."

For that reason, some analysts think they may leave the wording unchanged at Tuesday's meeting and only change it when they actually have reached the end of the current rate increases sometime next year.

12-14-2005, 01:26 AM
"If your only tool is a hammer, everything starts to look like a nail." -- Mark Twain

12-14-2005, 03:15 AM
Fed Boosts Interest Rate to Highest Level in 4 1/2 Years, but Signals Hikes May Be Winding Down

WASHINGTON (AP) -- The Federal Reserve lifted interest rates to the highest level in 4 1/2 years Tuesday but also indicated its 18-month rate-raising campaign was winding down. At least one more increase in borrowing costs seemed in store to keep inflation under control.
Chairman Alan Greenspan and his Fed colleagues voted unanimously to boost the federal funds rate, the interest banks charge each other on overnight loans, by one-quarter percentage point to 4.25 percent.

It was the 13th consecutive increase of that size since June 2004. That's when the Fed policy-makers embarked on a credit tightening campaign to lift the funds rate -- which had been sliced to a 46-year low of 1 percent when the economy was faltering -- to more normal levels.

Fed policy-makers had mostly positive things to say Tuesday about the economy, especially its ability to grow solidly despite the Gulf Coast hurricanes.

In response to the rate increase, commercial banks began increasing their prime lending rate -- for certain credit cards, home equity lines of credit and other loans -- to 7.25 percent, also the highest in 4 1/2 years.

For investors and economists, the Fed's words spoke louder than its rate action, which was expected.

The Fed policymakers, in a statement issued after their closed-door meeting, eliminated a description they had used each time they raised rates over the past year and a half -- that even with the increases rates were still quite low.

Economists viewed that deletion as a sign from the Fed that its rate-raising campaign was drawing to a close.

On Wall Street, stocks got a lift from that, with the Dow Jones Industrials closing up 55.95 points.

Still, the Fed signaled there is more work to be done before it declares that the economy and inflation are on an even keel.

The statement said, "Some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

Importantly, the Fed opted to keep the word "measured" to describe future rate increases. Economists have taken that to mean quarter-point rate hikes.

"The underlying message here is that the Fed is rounding for third and heading for home plate. But they are not finished playing yet," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Most economists expect another quarter-point increase at the Fed's next meeting Jan. 31. That will mark the last meeting for Greenspan, who will retire after 18-plus year at the helm.

Many economists also expect another quarter-point increase to follow on March 28, which would be Ben Bernanke's first meeting as Fed chief. That would leave the funds rate at 4.75 percent, where the Fed would move to the sidelines.

Others, however, predict another increase will come at the May 10 meeting, leaving the funds rate at 5 percent. A few believe the Fed won't stop until the funds rate is boosted to 5.50 percent in August.

The ultimate course of interest rates will be shaped by what economic barometers going forward say about the economy's standing and the nation's inflation climate.

For now, the economic picture looks pretty good, Fed policymakers said.

"Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid," they said. And "core" inflation, which excludes energy and food prices, "has stayed relatively low," they observed.

Yet there are inflation risks, they said.

In another important change to the policy statement, Fed members cited "possible increases in resource utilization" which economists said was code for a strengthening job market as having "the potential to add to inflation pressures." Policymakers also dropped a reference contained in many past Fed statements about healthy productivity gains. Productivity gains help to blunt inflation.

Altogether, those changes "indicate a higher level of concern with respect to future inflation," said Mark Zandi, chief economist at Moody's Economy.com.

Economists said that was another signal a few more rate increases probably will be in the offing. But Zandi said, "They are close to the end of nearly two years of rising interest rates."

The Fed's action comes against a recent string of largely good economic news.

The economy grew at an energetic 4.3 percent pace in the third quarter despite the ill effects of the hurricanes. Economists expect solid growth in the current October-to-December period. A 0.3 percent increase in sales at the nation's retailers in November, released Tuesday, suggested shoppers are spending modestly.

Employment, meanwhile, rebounded in November after a two-month lull, with payrolls expanding by 215,000.