|
Fed raises rate a quarter early { February 2 2005 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2005/02/02/business/02cnd-fed.htmlhttp://www.nytimes.com/2005/02/02/business/02cnd-fed.html
February 2, 2005
Fed Raises Rates a Quarter Point
By EDMUND L. ANDREWS
WASHINGTON, Feb. 2 - The Federal Reserve raised short-term interest rates today, its sixth increase since last June, and signaled that its strategy of gradually raising rates is far from over.
The central bank nudged up the federal funds rate, the rate charged on overnight loans between banks, by a quarter of a point, to 2.5 percent.
In a statement issued that accompanied today's decision, the policy-setting Federal Open Market Committee repeated its previous declarations that it could afford to raise rates at "a pace that is likely to be measured."
The Fed also repeated almost word for word its previous sanguine view about the outlook for both economic growth and inflation. In so doing, it gave no hint of either slowing down or speeding up the process of tightening monetary policy.
With today's decision, the Fed has now more than doubled overnight lending rates from their 46-year low of 1 percent eight months ago.
But even with the latest rate increase, short-term borrowing costs are barely equal to the pace of inflation and below historical averages. More importantly, long-term interest rates for corporate bonds and home mortgages have actually declined in recent months.
Indeed, analysts say there is so much money available for lending that financial institutions are squeezing down rates for relatively high-risk corporate borrowers.
"There is so much liquidity in the marketplace that the only way lending institutions can compete is by lowering rates," said William Zadrozny, chief executive of Siemens Financial Services, which provides financing for business equipment and a wide array of other needs. "People are reaching to employ their money."
The spread between interest rates for risk-free 10-year Treasury bonds and riskier corporate bonds have narrowed to their lowest levels since 1998, according to data compiled by Richard Yamarone, chief economist at Argus Research, an economic consulting firm in New York.
"It's too much money chasing too few goods," said Mr. Yamarone, harkening back to the description of inflation originally coined by the economist Milton Friedman.
The spread between rates on 10-year Treasury bonds and corporate junk bonds, those rated Baa by Moody's Investor Service, has declined from 3.01 percent in March 2001 to just 1.76 percent as of last week.
In its statement, the Federal Open Market Committee reiterated its fairly sanguine view that economic growth remains strong and inflationary pressures are still low.
Even though some Fed officials have begun to worry that rising wage costs and slowing growth of productivity could fuel inflation, the central bank said today that the upside and downside risks to both inflation and growth are still "roughly equal."
"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," the policy-making committee said in its statement.
By reiterating that monetary policy is still "accommodative," the Fed signaled that it has not yet approached a "neutral" level of interest rates that neither encourages inflation nor slows down the economy.
Alan Greenspan, chairman of the Fed, has refused to say what a "neutral" rate would be in practice. But most analysts expect the Fed to keep raising overnight rates until they reach at least 3.5 percent and perhaps 4 percent.
Investors had almost unanimously expected the quarter-point increase today. Stock and bond prices and the dollar were little changed this afternoon after the Fed announced its decision.
Mr. Greenspan is expected to shed more light about the Fed's plans when he testifies before House and Senate banking committees on Feb. 16 and 17.
Fed officials face several big uncertainties as they plot their strategy. They need to dissect conflicting pressures on inflation: consumer prices have climbed more slowly in recent months, but last year's run-up in oil prices has yet to have its full impact.
Potentially more important, Fed officials must grapple with the possibility of a prolonged slowdown in productivity growth and rising wage costs.
Copyright 2005 The New York Times Company
|
|
