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Fed Raises Key Interest Rate to 5 Percent
Yahoo ^ | 05/10/06 | Martin Crutsinger, AP

Posted on 05/10/2006 12:06:52 PM PDT by Moonman62

WASHINGTON (AP) -- The Federal Reserve on Wednesday raised a key interest rate to the highest level in more than five years but signaled that it may pause to assess the impact of its string of rate hikes.

The Fed boosted its target for the federal funds rate to 5 percent. The funds rate, the interest that banks charge each other, stood at a 46-year low of 1 percent when the central bank began raising rates in June 2004 to keep inflation under control.

In its statement announcing the decision, Fed policy-makers indicated they may take at least a brief pause in pushing rates up further. It said the "extent and timing" of further rate increases would depend on future economic data.

The Fed's rate hikes have raised the borrowing costs for millions of Americans on everything from adjustable rate home mortgages to auto loans. Commercial banks were expected to quickly match the Fed action by boosting the prime lending rate to a five-year high of 8 percent.

Fed Chairman Ben Bernanke had raised expectations that the central bank was getting ready to pause when he said in congressional testimony on April 27 that the central bank might take a break for "one or more meetings."

Bernanke, who succeeded the legendary Alan Greenspan as Fed chairman on Feb. 1, said a pause would give the central bank time to assess the impact that its long string of rate increases was having on the economy.

In the statement announcing Wednesday's rate increase, the Fed said that some further rate hikes "may yet be needed." That marked a slight modification from the March statement when it stated that further rate increases "may be needed."

It added another phrase in the latest statement saying that "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."

Bernanke had created confusion about the exact meaning of his congressional remarks when he was quoted by CNBC as saying that financial markets had misread his congressional testimony.

That comment came after bond prices, always sensitive to inflation worries, had fallen on fears that Bernanke would not be as tough as Greenspan had been in fighting inflation.

Private economists are split over whether Wednesday's rate hike will be the last for awhile or whether the Fed may pause for one or two meetings and then raise rates another one or two times to make sure that a recent jump in energy prices does not spill over into more widespread inflation problems.

In assessing the current state of the economy, the Fed's brief statement tracked the comments Bernanke had made to the Joint Economic Committee.

The statement said that while economic growth had been "quite strong so far this year," the central bank still expected growth would moderate to a more sustainable pace, "partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

The overall economy grew at a sizzling pace of 4.8 percent in the first three months of this year, the fastest spurt for the gross domestic product in 2 1/2 years. But private forecasters believe growth has slowed in the current quarter, reflecting in part rising mortgage rates, which have dampened home sales.

On inflation, the Fed said that the surge in energy prices so far had had "only a modest effect on core inflation" with inflation expectations remaining contained.

The statement noted a unanimous vote for the quarter-point increase in the funds rate.


TOPICS: Business/Economy; News/Current Events
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To: familyop

Every time they signal they might stop raising rates, the dollar drops against other currencies. And to keep the T-bill market going, they have to not drop rates.

They are between a rock and a hard place. Rate increases hurt the housing sector. Without rate increases, foreign investment dries up.

Glad I ain't a banker.


21 posted on 05/10/2006 1:02:23 PM PDT by djf (Bedtime story: Once upon a time, they snuck on the boat and threw the tea over. In a land far away..)
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To: Sabatier

The government doesnt determine anything as far as interest rates. The FDIC does. Check on it. Its a few banks setting the rates for the currency and all Congress does is go along.


22 posted on 05/10/2006 1:03:19 PM PDT by crz
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To: djf

Indeed.


23 posted on 05/10/2006 1:03:21 PM PDT by economist-student
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To: djf

That was objective, well written and true.


24 posted on 05/10/2006 1:53:01 PM PDT by familyop ("Either you are with us, or you are with the terrorists." --President Bush)
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To: economist-student
If I were a member of the FOMC, I would raise interest rates up to 20-25%. I think saving the US dollar is more important than "employment".

That's what Volcker did, but the other way to save the dollar is to let the economy grow and restrain government growth.

25 posted on 05/10/2006 2:28:34 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: DoctorMichael
Its not. They are, in essence, rigging the free market capitalist system and affecting changes in it.

However, in a rational sence, they are controlling the Economy so as to smooth out the Highs and Lows (the Amplitude of the Waves).

I respectfully disagree. Have you ever heard of pilot induced oscillations or Edward Deming? Trying to control a variable, especially without enough information, leads to larger oscillations in the variable.

26 posted on 05/10/2006 2:35:52 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Sabatier
"The Fed's rate hikes have raised the borrowing costs for millions of Americans on everything from adjustable rate home mortgages to auto loans." So the government determines this crucial aspect of the marketplace. In what sense is that free market capitolism at work?

It isn't and isn't supposed to be. There is a valid reason to increase the money supply to keep prices from deflating. The problem is Presidents like to have dollar policies, usually weak ones, and the Fed usually accomodates that. The Fed also doesn't believe in market signals like the yield curve, so they move rates around until they break something or they hit a nice round number.

27 posted on 05/10/2006 2:42:45 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: spikeytx86
Why don't they f**king stop tinkering with the rate until you know prices actually start to go up!

Because they have Phd's, and they are given wide lattitude to make mistakes by the government. They don't get paid for being right, and get their rewards by being powerful and shoveling manure instead.

28 posted on 05/10/2006 2:46:14 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: palmer

Yes, the money supply is expanding, but so are deflationary forces throughout the globe. It's impossible to keep track of it all. Thus market signals need to be used. Commodities are a legitimate signal, but one must account for all the reasons why they are going up. It's just not money supply. The yield curve indicated that the Fed should have stopped raising rates awhile back.


29 posted on 05/10/2006 2:50:27 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: djf
"the dollar drops against other currencies. And to keep the T-bill market going.."

Indeed. I received an email from a Fed watcher this morning and he said the very same; the Fed would have to raise rates to preserve the risk premium in short and mid-term bonds and to prop up the dollar.

I will say that their full comments were not as hawkish as he predicted they would be...might be they know they're at the end of the string.

30 posted on 05/10/2006 2:50:42 PM PDT by Proud_texan (I'm gonna break my rusty cage and run)
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To: VeniVidiVici
Well, that statement gives me warm fuzzies. "We're not sure what impact the rate hikes are having so we'll stop for awhile and see.".

Excellent observation. They also decide to stop on a round number. Another clue that they are clueless, but well educated, and never held accountable.

31 posted on 05/10/2006 2:52:17 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: familyop
Rate hikes are a way to keep our US dollar high with respect to other currencies.

It's one way, but the best way is to let the economy grow while restraining government growth.

32 posted on 05/10/2006 2:53:40 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Moonman62

...agreed, and well written!


33 posted on 05/10/2006 2:55:06 PM PDT by familyop ("Either you are with us, or you are with the terrorists." --President Bush)
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To: djf
Every time they signal they might stop raising rates, the dollar drops against other currencies.

The other day they signalled they would keep raising rates and the dollar still dropped.

And to keep the T-bill market going, they have to not drop rates.

The best way to keep that market going would be for the government to stop issuing so much debt.

They are between a rock and a hard place. Rate increases hurt the housing sector.

Yes.

Without rate increases, foreign investment dries up.

Domestic investment is far more important. Slowing down economic growth with rate increases hurts domestic investment. We need to restrain government growth, and let the economy grow.

Glad I ain't a banker.

Why not? Have you checked their stocl prices? They've learned to adapt to a rising rate environment.

34 posted on 05/10/2006 3:00:31 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Moonman62
"Yes, the money supply is expanding, but so are deflationary forces throughout the globe."

Yes. And BTW, the yen is less than a penny on the US dollar.

Please permit me a little parabolic irony here. Are the Japanese starving to death or otherwise living in terrible poverty now? Should a gradually lower US dollar toward the yuan signal the end of the USA and that we should all run for our lives?
35 posted on 05/10/2006 3:00:38 PM PDT by familyop ("Either you are with us, or you are with the terrorists." --President Bush)
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To: Moonman62
The yield curve indicated that the Fed should have stopped raising rates awhile back.

Bernanke said that was just one thing he looked at and he's right. The low long term yields don't necessarily indicate low inflation or deflation expectations. Often long term rates fall just because of anticipation of falling short term rates. Anyway, the world is awash in long term money as well as Fannie Mae, GM and other had incentive to borrow short and lend long. That incentive will undoubtedly come back as the Fed caves to political pressures and lowers short term rates. As for deflation, what I see mostly is a huge glut of Chinese and now Vietnamese and other manufacturing undercutting each other.

36 posted on 05/10/2006 5:44:59 PM PDT by palmer (Money problems do not come from a lack of money, but from living an excessive, unrealistic lifestyle)
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To: palmer
Bernanke said that was just one thing he looked at and he's right.

And in recent weeks he's said that the yield curve doesn't matter. He's reasoning is that absolute rates are historically low. He is speaking as an elitist who thinks he is smarter than the markets. The yield curve is an indicator of how much the Fed is manipulating the market, not absolute rates.

Your reasoning makes more sense. But one should note that the global markets, as they adopt technology and their markets grow, they are going to give us many opportunities to import deflation. The yield curve should not be dismissed on a gut feeling as Greenspan and just about every Fed chairman has done. It is still the best predictor of recession.

37 posted on 05/10/2006 5:59:25 PM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Moonman62
"....I respectfully disagree. Have you ever heard of pilot induced oscillations or Edward Deming? Trying to control a variable, especially without enough information, leads to larger oscillations in the variable...."

I agree with your 'disagreement': The very act of intervening in the system may have unforseen results. For example, [IMHO] Greenspan brought on the 'Crash of 1987' by his continued raising of interest rates in an effort to supposedly 'control inflation'. The Market got spooked, sell programs kicked in, everyone jumped for the 'exits' at once, and there was a massive downdraft in the market.

Nonetheless, the Fed does it because it can. In saying this I ascribe no 'right' or 'wrong' to my original answer. This is merely the explanation I'm sure you would get if you were to ask anyone, or that I remember from my undergraduate year of Macro- & Micro-Economic Theory.

38 posted on 05/11/2006 7:14:21 AM PDT by DoctorMichael (The Fourth Estate is a Fifth Column!!!!!!!!!)
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To: Moonman62
I just scrolled back and saw this comment.........

".... It's one way, but the best way is to let the economy grow while restraining government growth....."

I agree 100%.

39 posted on 05/11/2006 7:17:23 AM PDT by DoctorMichael (The Fourth Estate is a Fifth Column!!!!!!!!!)
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