Fed Increases Interest Rates - Again

The Federal Reserve on Tuesday once again raised interest rates, the 10th increase in 14 months, and signaled that more rate hikes are likely.

The central bank stated that it would raise short-term rates at a "measured" pace, a term that analysts believe will translate into quarter-point increases at Fed meetings set for September, November and December, the Associated Press reported.

The Federal Open Market Committee (FOMC) raised a key short-term rate by one-quarter percentage point to 3.5 percent. In just over a year, the benchmark rate has increased 2.5 percentage points. Consumers will see that increase reflected in higher interest rates for car loans and credit cards. The move pushed the prime up to 6.5 percent.

The Fed noted that economic growth is strong despite rising energy prices, but also expressed concern that “pressures on inflation have stayed elevated."

Laurence H. Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers, a forecasting firm, told The New York Times, “A policy mistake may have been made. They may have lingered too long" at interest rates that will eventually cause a surge in inflation.

The economy is confusing some analysts. Long-term interest rates, on mortgages for example, remain lower than they were a year ago, when the Fed started raising rates.

The labor market is also complicated. Wages for most workers have recently been rising no faster than inflation, often a sign that the economic growth is not robust enough to set off inflation. However, pay increases often lag significantly behind job growth, and some economists say that the Fed should continue increasing interest rates to prevent wages, and inflation, from increasing over the next year, the Times reported.

Michael Wallace, a global market strategist for Action Economics, wrote in BusinessWeek Online, “The combination of the latest FOMC statement and the trajectory of recent economic and inflation data suggest to us that the Fed will continue to snug up interest rates through at least the end of Chairman Greenspan's term in January.” He expects the benchmark rate, the federal funds rate, to be 4.5 percent in February.

Allan B. Hubbard, director of the National Economic Council, told reporters that most people "in terms of their personal finances, feel very good about the economy. At the same time, there is unease about the economy in general," he said. "None of us are comfortable paying $2.50 per gallon when we go to fill up our cars with gas." And, he said, "We are a nation at war."


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