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Fed Raises Key Rate to 3.5%, Continuing String of Increases
By JOSEPH REBELLO DOW JONES NEWSWIRES August9,20052:20p.m.
WASHINGTON -- The Federal Reserve, citing "elevated" price pressures in the U.S. economy, boosted its key interest rate to a four-year high Tuesday and said it aims to extend the campaign of gradual interest-rate increases it began in mid-2004.
Amid signs the economy is gaining speed despite record oil prices, Fed policymakers voted unanimously to raise the key federal funds rate a quarter percentage point to 3.5%. The increase, the tenth since June 2004, made the campaign of rate hikes the longest since Alan Greenspan became Fed chairman in 1987.
"Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor-market conditions continue to improve gradually," the Fed's Open Market Committee said in a statement. It reasserted its previous view that "pressures on inflation have stayed elevated" but added that "core inflation has been relatively low in recent months and longer-term inflation expectations remain well-contained."
The committee hinted it intends to raise the funds rate at least once more, possibly as early as Sept. 20, saying the rate remains too low -- "accommodative" in Fed parlance. It pledged, however, to raise the rate in "measured" increments. That phrase so far has signified increases of a quarter percentage point at a time.
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But new revisions to government economic data have shown inflation was stronger over the last year than previously thought. The Fed strives to keep the inflation rate, as measured by the core price index for personal consumption expenditure, within a range of 1% to 2%. For the 12 months that ended in March, that rate was 2.4% -- well above the 2% rate the government initially estimated.
The U.S. economy, moreover, has regained steam after a mild slowdown in the spring. Employers added 207,000 non-farm jobs to their payrolls in July, dispensing wage increases that were the largest in a year. Amid strong sales, business inventories declined sharply in the second quarter, suggesting economic growth could accelerate later this year as businesses rebuild their stocks.
Those developments are likely to have altered the terms of debate among Fed policymakers, analysts said. In raising the funds rate over the last 14 months, Fed policymakers have said they're aiming for a "neutral" point at which the rate no longer is stimulative. Over the last few months, some policymakers began to suggest the FOMC was approaching that threshold, meaning the end was in sight for the interest-rate campaign.
"The incoming evidence on the strength of the economy has significantly weakened the argument that the committee should take an early pause to assess the level of the neutral funds rate," Former Fed Governor Laurence Meyer, now an economic consultant, said in a note to clients Monday. He predicted the Fed will not "pause" before March, by which time the funds rate would be 4.5%.
Bill Dudley, an economist with Goldman Sachs & Co. in New York, predicted the Fed will raise the funds rate well past that point. The funds rate will climb to 5% by the middle of next year, he said in a note to clients.
"The FOMC seems at least as far from the magical land of a "neutral" federal funds rate today as it was six weeks ago," Dudley wrote. "That is because the economy now appears to have considerably more momentum and because the revisions to GDP over the past few years now show a less favorable trade-off between growth and inflation."
Fed Raises Key Rate to 3.5%, Continuing String of Increases
By JOSEPH REBELLO DOW JONES NEWSWIRES August9,20052:20p.m.
WASHINGTON -- The Federal Reserve, citing "elevated" price pressures in the U.S. economy, boosted its key interest rate to a four-year high Tuesday and said it aims to extend the campaign of gradual interest-rate increases it began in mid-2004.
Amid signs the economy is gaining speed despite record oil prices, Fed policymakers voted unanimously to raise the key federal funds rate a quarter percentage point to 3.5%. The increase, the tenth since June 2004, made the campaign of rate hikes the longest since Alan Greenspan became Fed chairman in 1987.
"Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor-market conditions continue to improve gradually," the Fed's Open Market Committee said in a statement. It reasserted its previous view that "pressures on inflation have stayed elevated" but added that "core inflation has been relatively low in recent months and longer-term inflation expectations remain well-contained."
The committee hinted it intends to raise the funds rate at least once more, possibly as early as Sept. 20, saying the rate remains too low -- "accommodative" in Fed parlance. It pledged, however, to raise the rate in "measured" increments. That phrase so far has signified increases of a quarter percentage point at a time.
.........................................
But new revisions to government economic data have shown inflation was stronger over the last year than previously thought. The Fed strives to keep the inflation rate, as measured by the core price index for personal consumption expenditure, within a range of 1% to 2%. For the 12 months that ended in March, that rate was 2.4% -- well above the 2% rate the government initially estimated.
The U.S. economy, moreover, has regained steam after a mild slowdown in the spring. Employers added 207,000 non-farm jobs to their payrolls in July, dispensing wage increases that were the largest in a year. Amid strong sales, business inventories declined sharply in the second quarter, suggesting economic growth could accelerate later this year as businesses rebuild their stocks.
Those developments are likely to have altered the terms of debate among Fed policymakers, analysts said. In raising the funds rate over the last 14 months, Fed policymakers have said they're aiming for a "neutral" point at which the rate no longer is stimulative. Over the last few months, some policymakers began to suggest the FOMC was approaching that threshold, meaning the end was in sight for the interest-rate campaign.
"The incoming evidence on the strength of the economy has significantly weakened the argument that the committee should take an early pause to assess the level of the neutral funds rate," Former Fed Governor Laurence Meyer, now an economic consultant, said in a note to clients Monday. He predicted the Fed will not "pause" before March, by which time the funds rate would be 4.5%.
Bill Dudley, an economist with Goldman Sachs & Co. in New York, predicted the Fed will raise the funds rate well past that point. The funds rate will climb to 5% by the middle of next year, he said in a note to clients.
"The FOMC seems at least as far from the magical land of a "neutral" federal funds rate today as it was six weeks ago," Dudley wrote. "That is because the economy now appears to have considerably more momentum and because the revisions to GDP over the past few years now show a less favorable trade-off between growth and inflation."
