10th rate hike for Federal Reserve; more to come
August 9, 2005
WASHINGTON – The Federal Reserve on Tuesday boosted a key interest rate for a 10th time and signaled that more rate hikes were likely as the central bank keeps pushing borrow-ing costs higher to contain inflation.
The action pushed the Fed’s target for the federal funds rate up to 3.5 percent, the highest level in almost four years.
The move was certain to be followed by an announcement by commercial banks that they were increasing their prime rate, the benchmark for millions of consumer and business loans, by a similar quarter-point. That would put the prime at 6.5 percent, its highest point in four years.
David Greco of Paragon Financial said he doesn’t foresee a doomsday consequence for the South Lake Tahoe real estate market, arguing that those who can afford that second home in Tahoe probably won’t quibble over their payment going up by $50.
“We’re just rate sensitive because we’ve been spoiled (by the rates),” he said.
Wall Street reacted positively to the widely expected Fed action. The Dow Jones industrial average, which was already trading higher on news of a retreat in oil prices, rallied further following the Fed’s afternoon announcement.
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Analysts said the Fed is certain to keep raising rates at its coming meetings.
“The Fed gave no hint that we are near the end of rate increases,” said Lynn Reaser, chief economist at Banc of America Capital Management Inc.
Other analysts said the Fed appeared to be very satisfied with how the economy is performing in response to its policy of gradual rate increases.
“My sense is that the Fed is looking at something that is about as close to ideal as you can ask for on the economy,” said David Jones, chief economist at DMJ Advisors, an economic consulting firm.
The Fed has raised interest rates at every one of its meetings going back to June 2004 when the funds rate, the interest that banks charge each other, stood at a 46-year low of 1 percent.
In its latest announcement, the Fed kept language pledging to move rates up “at a pace that is likely to be measured.” That phrase is interpreted by financial markets as signaling continued quarter-point moves.
Tuesday’s announcement had been widely anticipated after Federal Reserve Chairman Alan Greenspan told Congress last month that further rate increases were needed to make sure solid economic growth did not trigger inflation pressures.
Many analysts believe the Fed will keep raising interest rates at its final three meetings of the year, in September, November and December, leaving the funds rate at 4.25 percent at year’s end.
The central bank acted as President Bush talked economic policy at his Texas ranch with his domestic policy advisers.
Speaking to reporters there, Bush proclaimed the economy as “strong” and said the “foundation for sustained growth is in place.” He sidestepped a question about interest rate increases, saying “I trust the judgment of Chairman Alan Greenspan.”
A wide range of recent economic reports has indicated that the economy is growing at a solid pace despite the fact that energy prices have surged to new record levels approaching $64 per barrel on Monday.
The Fed took note of current economic conditions in its brief announcement, stating that consumer and business spending have strengthened since the late winter despite high energy prices and labor market conditions have continued to improve gradually.
The Fed said that inflation outside of energy and food “has been relatively low in recent months” and that long-term inflation expectations remain well contained. But it retained a cautionary warning that “pressures on inflation have stayed elevated.”
Private analysts believe the Fed’s credit tightening campaign will keep mortgage rates and other consumer interest rates rising in the months ahead but at a pace that should be gradual enough to only modestly slow the nation’s booming housing market.
Economists are not looking for mortgage rates to suddenly begin surging. They are forecasting that the 30-year mortgage, currently at 5.82 percent, will be around 6.25 percent by the end of this year and probably around 6.5 percent in the summer of 2006, still a historically low level for mortgage rates.
While some analysts had thought that the Fed might skip a meeting or two in its rate hikes this year, that view changed after the economy showed new vigor in recent weeks following the spring slowdown.
Overall economic growth, as measured by the gross domestic product, came in at a solid 3.4 percent rate in the April-June quarter, and many analysts believe the GDP is expanding at a pace above 4 percent in the current quarter. The solid growth helped the economy create 207,000 jobs in July, the best showing in three months.
-Tribune staff writer Susan Wood contributed to this report.