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Fed raises rates in august Original Source Link: (May no longer be active)
http://msnbc.msn.com/ID/5661826/http://msnbc.msn.com/ID/5661826/
Fed again raises interest rates
Federal funds rate now at 1.5 percent
By Martin Wolk
Chief economics correspondent
MSNBC
Updated: 2:27 p.m. ET Aug. 10, 2004
The Federal Reserve Tuesday raised a key interest rate for the second time this year, saying the economy is "poised to resume a stronger pace of expansion" despite recent evidence of "softness."
The central bank raised the overnight federal funds rate a quarter-point to 1.5 percent, slightly increasing borrowing costs for many businesses and consumers. The move, which had been widely anticipated, came despite Friday’s startling report that the economy created just 32,000 jobs in July, far short of the 220,000 or so that forecasters were expecting. It was the second straight month of weak job growth and raised the possibility that what Fed Chairman Alan Greenspan has described as an economic “soft spot” is lasting longer than anticipated.
In a statement accompanying the announcement of the rate hike Tuesday, the Fed said the recent sharp increase in energy prices probably is to blame for much of the slowdown in activity.
Because the employment report came out so soon before Tuesday’s meeting of Greenspan and fellow policy-makers, the Fed had little choice but to follow through on its previously stated plan to continue with a “measured” series of rate hikes, analysts said. Anything else could have spooked financial markets by giving the impression the Fed was worried about the possibility of a further slowdown. The Fed reiterated Tuesday that it expects to continue a "measured" pace or rate hikes but added that it "will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
Stock prices, which lost more than 3 percent on average last week, were up sharply Tuesday and had little immediate reaction to the Fed announcement.
Despite the weak employment figures, most analysts believe the economy is in relatively good shape based on a range of other indicators including rising business and consumer confidence and early evidence of stronger retail sales in July.
But some analysts believe the Fed may choose to leave rates unchanged at the next scheduled meeting of policy-makers Sept. 21, especially if the August employment report is weak. That likely would leave rates unchanged until after the presidential election because the Fed’s policy-making Open Market Committee is not scheduled to meet again until Nov. 10.
The Fed lowered rates 13 times from January 2001 through June 2003, bringing the benchmark overnight rate to its lowest level in 46 years in an effort to stimulate the economy after the end of the nation’s longest postwar expansion. Some analysts say the tremendously low rates are no longer needed, especially now that the threat of deflation appears to have passed, and with it a dangerous the risk to the stability of the banking system.
Lynn Reaser, chief economist for Banc of America Capital Management, said she still believes the Fed will raise rates by another quarter-point Sept. 21.
“Overall the economy seems to be experiencing only a temporary pause, but with the weakness in job growth and continued high level of oil prices we do think there is increased risk to the outlook,” she said.
Complete text of Fed statement
"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/2 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.
In a related action, the Board of Governors unanimously approved a 25 basis point increase in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco."
© 2004 MSNBC Interactive
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