Fed raises interest rates
.50 percent
By Michael
D. Larson • Bankrate.com
Federal
Reserve Board officials jacked up
the main interest rate they control to its highest level in more
than nine years as part of an ongoing -- but so far, essentially
futile -- effort to slow the economy.
The federal funds rate will climb one-half of a
percentage point, or 50 basis points, to 6.5 percent because of the
move, which was announced
this afternoon. Members of the
Federal
Open Market Committee, the Fed's policy-setting arm, also boosted
the federal discount rate 50 points to 6 percent.
The latest hike comes amid mounting evidence
that five previous increases, which raised the funds rate to 6 percent
from 4.75 percent in early June 1999, have had virtually no effect
on the economy. In fact, unemployment has fallen further, inflation
has picked up and stocks have powered higher since the Fed began
tightening the screws almost a year ago.
"Increases in demand have remained in excess
of even the rapid pace of productivity-driven gains in potential
supply, exerting continued pressure on resources," the FOMC's post-meeting
summary said. "The Committee is concerned that this disparity in
the growth of demand and potential supply will continue, which could
foster inflationary imbalances that would undermine the economy's
outstanding performance." (For full text of release, click here.)
So will this 50-point spanking be the straw
that breaks inflation's back? Probably not. The FOMC has made it
a policy to include one of three statements in its post-meeting
summary. Today's statement -- "Against the background of its long-term
goals of price stability and sustainable economic growth and of
the information already available, the Committee believes the risks
are weighted mainly toward conditions that may generate heightened
inflation pressures in the foreseeable future" -- is the worst of
the three for consumers because it signals officials are leaning
toward raising rates further.
Nevertheless, experts remain divided on exactly
how many more hikes will be needed to accomplish Alan Greenspan's
goals. April retail sales and inflation numbers weren't as brutal
as those seen earlier this year, prompting some to suggest the recent
hikes are starting to work.
At the same time, wage and benefit costs have
shown signs of rising faster than before. The price of oil is hovering
around $30 a barrel again, too. Throw in still-robust consumer spending
and we may have a recipe for more drastic Fed measures than optimists
expect.
The next FOMC meeting will be a two-day affair
on June 27 and 28. After that, borrowers will get a break until
Aug. 22.
-- Posted: May 16, 2000
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