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I think it equally irrational how the markets continue to thumb their
noses at the FED...
JW
Tuesday March 21 6:00 PM ET
Fed Bumps Up U.S. Rates, Warns of More to Come
By Knut Engelmann
WASHINGTON (Reuters) - The Federal Reserve nudged up key short-term
interest rates on Tuesday to their highest level in five years and
warned that further increases in credit costs would likely be needed to
keep inflation at bay.
In a bid to keep the record U.S. expansion on track, the Fed raised its
target for the federal funds overnight bank lending rate by 0.25
percentage points to 6.0 percent. To amplify its decision, the central
bank also increased the less-used discount rate on direct loans to banks
by the same amount to 5.5 percent.
The widely expected move boosted sentiment in financial markets, where
investors had long priced in a modest rate increase. Some appeared
relieved they did not have to deal with a more aggressive tightening
step -- at least for now.
Leading U.S. banks followed suit within minutes of the Fed's decision
and bumped up their so-called prime rates, which determine borrowing
costs for credit cards and personal loans.
Using standard language to describe its assessment of the U.S. economy
in the foreseeable future, the central bank said the risks were
``weighted mainly toward conditions that may generate heightened
inflation pressures.''
That assessment would help it justify further increases in borrowing
costs that most economists have forecast. Analysts expect at least one
more rate move, some two, and some even three, this year. The Fed's next
meeting is on May 16.
``The Fed will in all likelihood tap on its monetary brakes once
again,'' said John Lonski, chief economist at Moody's Investors Service
in New York. ``But provided that we have a still well-contained rate of
inflation, there is no need for the Fed to tighten more aggressively.''
Been There, Done That
In its statement, issued after the closed-door meeting of the rate
setting Federal Open Market Committee, the central bank said it had
faced ``essentially'' the same economic circumstances as when it last
raised rates on Feb. 2.
``The committee remains concerned that increases in demand will continue
to exceed the growth in potential supply, which could foster
inflationary imbalances that would undermine the economy's record
economic expansion,'' it said.
Inflation-sensitive bond prices moved higher after the announcement, and
yields, which move in the opposite direction to price, fell. The stock
market, a key factor in the Fed's thinking, rallied. Both the Dow Jones
industrial average and the technology-heavy Nasdaq closed more than 2
percent higher. The dollar rose against key currencies.
Tuesday's move was the fifth time the Fed has raised its key rates since
June of last year, its first sustained cycle of monetary tightenings
since the mid-1990s.
But there is no sign yet that those increases have slowed the economy
noticeably from its torrid growth rate of 6.9 percent late last year,
propelled by an insatiable consumer appetite for everything from new
houses to gas-guzzling sport utility vehicles. And with unemployment at
4.1 percent, the labor market remains tighter than ever in the past
generation.
Most economist thus expect Fed Chairman Alan Greenspan and his
colleagues on the FOMC to persist in their slow-motion monetary policy
of gradual increases in the fed funds rate.
``They haven't seen enough evidence that the rate increases they began
last June have really slowed down the economy so that's why they're
continuing on the same path,'' said Mario DeRose, Fixed Income
Strategist at Edward Jones in St. Louis.
According to a Reuters poll conducted after the Fed's announcement, 28
out of 29 leading Wall Street firms bet on another quarter-point rate
rise in May. About half look for the same kind of move at the subsequent
Fed meeting on June 27-28.
Dark Side Of The Boom
In recent appearances, Greenspan has argued that the world's top economy
risks overheating because productivity gains have boosted expectations
of corporate earnings, thus inflating stock prices and financing a
consumer spending boom.
Some have called it the dark side of productivity: The very force that
has been credited for keeping a lid on inflation is now blamed for
helping to boost demand to unsustainable levels. Coupled with the
tightest labor market in a generation, that has the Fed worried about
growing wage and price pressures.
But, so far at least, the Fed's moves have come against the background
of low and stable inflation. Even though oil prices have risen sharply,
overall consumer prices inched up just 0.5 percent in February. Taking
out the effect of energy and food prices, they were up a mere 0.2
percent -- hardly the smoking gun Greenspan would need to justify more a
aggressive stance.
Faced with election-year politics, the Fed has already come under fire
from some on Capitol Hill for tightening credit.
Sen. Byron Dorgan, a Democrat from North Dakota, said the Fed was wrong
to raise rates while productivity is rising and inflation low. ``They
are like a jury that disregards the evidence,'' he told Reuters. ``They
risk injuring this economy and they're hurting the working people.''
Added Sen. Tom Harkin, a Democrat from Iowa and long-time
Greenspan-critic: ``They are pushing to slow the economy. Doing so could
push us into a recession.''
The National Association of Manufacturers agreed, arguing that the U.S.
economy was likely to slow even without the help of higher rates. ``This
latest move was unnecessary,'' said NAM president Jerry Jasinowski in a
statement.
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