Posted on 06/30/2005 11:52:29 AM PDT by redgolum
WASHINGTON - The Federal Reserve, keeping a watchful eye on the impact of surging oil prices, raised a key interest rate by another quarter-point on Tuesday.
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The action pushed the federal funds rate up to 3.25 percent. It marked the ninth increase in the interest that banks charge each other on overnight loans and left this benchmark rate at its highest level since September 2001. When the Fed started its credit tightening campaign a year ago, the funds rate had been at a 46-year low of 1 percent.
In its announcement of the decision, the Fed retained a pledge it has been making for the past year to move rates up "at a pace that is likely to be measured," a phrase that has been read by financial markets as signalling continued quarter-point moves in the future.
The decision by Federal Reserve Chairman Alan Greenspan and his colleagues came as the economy is growing at a solid pace even though it is being buffeted by rising oil prices, which earlier this week hit a record high above $60 per barrel.
The Fed's statement said even with the rise in energy prices, the economy has continued to grow at a respectable pace.
"Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually," the statement said.
The government reported Wednesday that the overall economy grew at a healthy rate of 3.8 percent in the first three months of this year and many analysts believe growth in the current quarter will be only slighlty slower than that pace.
The Fed said that pressures on inflation "have stayed elevated" but repeated a belief it has made in past statements that "longer-term inflation expectations remain well contained."
That phrase is seen by markets as a signal that the Fed feels no need to accelerate its rate hikes.
Greenspan, testifying to Congress recently, described the economy as staying on a "reasonably firm footing" with inflation under control.
While consumer prices had jumped sharply in March and April, they actually declined for the first time in 10 months in May, reflecting a big plunge in energy prices.
The continued good performance of inflation, outside of energy, has allowed the Fed to nudge rates higher in small steps. The Fed is moving rates up from the historic lows in effect during a time when the central bank was trying to jump-start the economy following the 2001 recession.
The Fed's goal is to push the funds rate up to a neutral level where it is neither stimulating the economy nor holding back business growth. Many economists believe that calls for a funds level of around 4.25 percent, which could be reached by the end of the year if the Fed keeps boosting rates by a quarter-point at its August, September, November and December meetings.
Why would they raise rates if oil prices are high?
Explains why my stocks are down.
Not sure. But you have to blame it on something.
MEMO TO THE POMPOUS AT THE FED: Rising oil is, in and of itself, deflationary. Your adding a 1/4 pt. hike makes it even more so. But you already knew this, what with all the real-life experience you academics have had out in the real world.
3.8% growth? It's all Bush's fault. Yes, blame it on Bush. He's the one to blame. Bush. Cuz, like, the President controls everything, including all the infinite variables within the economy.
Because the government has to make up some kind of excuse to micromanage our economy.
The Fed obviously doesn't believe in market mechanisms. Do you think anyone in the MSM or our representatives will ever catch on?
"Why would they raise rates if oil prices are high?"
Because they're incapable of distinguishing cost-push inflation from demand-pull inflation, maybe?
Greenspan has power and he can only see manifestations of his power by changing rates. Because long rates haven't conformed with his textbook models, he is having sort of a temper-tantrum and is determined to raise short rates until long rates suddenly lurch into conformance with the models in pp213 - pp237 of his trusted 1953 macro-economic textbook.
I followed your link but didn't see anything about Greenspan.
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