Fed Watch: Fed raises rates .50 percent

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May 16, 2000 —
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.”

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 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.