Fed pushes interest rates up
November 10, 2004
WASHINGTON – The Federal Reserve nudged interest rates up another quarter-point on Wednesday, the fourth moderate rate increase in the past five months, as Fed officials pointed to encouraging signs that the economy is finally rebounding from its summer slowdown.
The generally more upbeat tone to the Fed’s official announcement was seen by many private economists as a signal that rates will keep moving higher in coming months.
“The Fed is saying that we have tightened and we are going to keep on tightening,” said David Wyss, chief economist at Standard & Poor’s in New York.
Federal Reserve Chairman Alan Greenspan and his colleagues took note of a strengthening economy by speaking more positively than they had at their last meeting in September about overall economic growth and the health of the labor market.
“Output appears to be growing at a moderate pace despite the rise in energy prices and labor market conditions have improved,” the Fed said. “Inflation and longer-term inflation expectations remain well contained.”
The latest move pushed the federal funds rate, the interest that banks charge each other, to 2 percent, double the 46-year low of 1 percent where the funds rate had been before the central bank began pushing rates higher in late June.
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Commercial banks quickly followed the Fed’s action Wednesday with announcements that they were raising their prime lending rate, the benchmark for millions of consumer and business loans, to 5 percent, up from 4.75 percent.
The Fed’s action had been widely expected and had little impact on Wall Street. The Dow Jones industrial average finished the day down 0.89 point to close at 10,385.48.
While just a week ago many investors had thought the Fed might take a pause in their credit tightening campaign, that view changed last Friday after the government released a much stronger-than-expected employment report showing businesses added 377,000 workers to their payrolls, the biggest increase in seven months and more than double what had been expected.
The surge in payroll growth was seen as the strongest evidence yet that the economy is finally emerging from a “soft patch” this summer when companies’ growth and hiring slowed dramatically as the economy was buffeted by a spike in energy prices.
The Fed’s only changes to its September announcement occurred in the more upbeat assessment of current economic conditions. It retained the promise it has been making that as long as inflation remains tame, future rate increases can be made “at a pace that is likely to be measured.”
Many analysts said they fully expected another quarter point move at the Fed’s last meeting of the year, Dec. 14, and then further quarter-point increases for most of 2005.
But they said this view could change rapidly if the recent spurt in oil prices proves to be a bigger drag on growth than currently believed or the economy is hit by an unexpected shock such as another terrorist attack.
“Sentiment could turn on a dime depending on external shocks,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “I think the Fed wants to err on the side of ease and not on the side of tightening because of all these uncertainties.”
Sohn and other analysts noted that even with the four quarter-point moves, interest rates on mortgages, auto loans and other types of consumer loans remain at historically low levels that are continuing to provide momentum to the economy as it rebounds from the 2001 recession and this year’s oil shock.
Gradual rate increases are expected to continue until the Fed has reached a “neutral” level where the funds rate is neither promoting faster growth nor holding the economy back. The Fed has never said what that rate is, but many analysts believe it is around 4 percent. At a pace of quarter point moves, and with the Fed meeting eight times a year, it could take until next fall to reach 4 percent.
Generally, analysts said the Fed statement’s tone expressed satisfaction with the economy,
“The Fed is happy with where the economy is right now with inflation low and with employment conditions improving,” said David Jones, head of DMJ Advisors.
Democratic presidential candidate John Kerry had argued that the summer slowdown and weak employment growth showed Bush was mismanaging the economy. But the administration contended the slowdown would be only temporary.
On the Net
Federal Reserve: http//www.federalreserve.gov/