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Fed raises rate to 2 percent in november Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000006&sid=at4S0ksfMnkY&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=at4S0ksfMnkY&refer=home
Fed Raises Target Rate to 2%, Keeps `Measured' Plan (Update3)
Nov. 10 (Bloomberg) -- Federal Reserve policy makers raised the benchmark U.S. interest rate for a fourth straight time and restated a plan to carry out further increases at a ``measured'' pace.
The Federal Open Market Committee raised the overnight bank lending rate by a quarter point to 2 percent, saying the labor market improved and the economy is showing ``moderate'' growth even amid higher oil prices. Another increase may be on tap for December, economists said.
``With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' the Federal Open Market Committee said in a statement after meeting in Washington. The vote to raise the overnight bank lending rate was unanimous.
``This shows they're satisfied at the moment that the economy is growing satisfactorily and that inflation is under very good control,'' said Lyle E. Gramley, former Fed governor and now an advise at Washington Research Group. ``It also increases the odds'' of a December increase.
Monetary policy remains ``accommodative,'' the Fed statement said, an indication that the FOMC will continue raising rates to what economists call a ``neutral'' level -- one that neither slows growth nor sparks inflation.
The Fed now has said at every meeting since May it expects to raise rates at a ``measured'' pace. ``The committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability,'' the statement said.
Spurring Growth
All 89 economists surveyed by Bloomberg News expected the FOMC to raise the overnight rate by a quarter point. U.S. Treasuries fell on the prospects for another increase in December. The benchmark 10-year Treasury note declined 1/8 point, pushing its yield up 2 basis points to 4.24 percent at 3:44 p.m.
Federal funds futures today show traders are building in about an 80 percent chance of a December increase, up from 48 percent before the Nov. 5 report showed the U.S. added 337,000 jobs in October, almost twice the median forecast. Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York, today changed his forecast for December to an increase from no-change.
``All the key elements of the past three statements remain intact,'' said Chris Low, chief economist at FTN Financial in New York, after the decision. ``There is no indication that the Fed is done, and no indication of a pause in tightening in December.''
The labor market and economic growth accelerated after the Fed cut its target rate to 1 percent, the lowest since 1958, in June 2003. The Fed now has moved its benchmark rate up a full percentage point in four moves over five months. The run of consecutive gains is the longest since 1994.
Consumer Rates
The economy expanded 3.9 percent in the 12 months ended in September, and the Fed wants to keep inflation under control.
``Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved,'' the Fed's statement said. The risks to growth and stable prices are ``roughly equal.''
The increase in the rate banks charge each other for overnight loans eventually may raise other borrowing costs on consumer and business loans and mortgages. So far there has been little effect from the higher fed funds rate.
Mortgage rates increased last week for the first time in a month, with the average 30-year fixed mortgage at 5.7 percent, up from the prior week's 5.64 percent, according to Freddie Mac. That's still half a percent below the 6.25 percent rate on June 30, when the Fed first raised rates. The yield on the 10-year Treasury note, to which many mortgages and consumer loans are tied, is more than a quarter percentage point below its June 30 level.
Oil Prices
General Motors Corp. cited Fed policy in a new offer to car buyers today. The world's largest automaker said customers can avoid rising rates by qualifying to receive financing as low as zero percent for 36 months for a vehicle now and can even lock in the same rate on their next purchase of a GM car or truck.
Energy prices led economists to reduce expectations for growth in the current quarter to a 3.5 percent annual rate, based on the median forecast in a monthly Bloomberg News survey released yesterday. A month ago the forecast was 3.8 percent.
The price of crude oil on the New York Mercantile Exchange peaked at $55.67 a barrel on Oct. 25 and traded at $48.85 today, up about 50 percent so far this year. Fed Chairman Alan Greenspan said Oct. 15 that higher oil prices represent about an $88.5 billion tax on consumers.
`They Didn't Hedge'
Employers hired 337,000 workers in October, the most since March, which raised the likelihood of an increase, according to investors. Before Friday's labor report, yields on federal funds futures suggested only a 48 percent chance that the overnight rate will rise to 2.25 percent at yearend.
``It would take a horrendous jobs report and a big spike in oil'' to make the Fed pause at the Dec. 14 meeting, said Eric Engen, former section chief at the Fed's central forecasting unit and now a resident scholar at the American Enterprise Institute. ``If there was any concern that they would go against the fed futures market, you'd probably see some preparation ahead of time by the chairman and the board members. They didn't hedge in their statement.''
Even so, a December rate increase would be unusual. The Fed hasn't raised interest rates in December since 1988.
For months, Fed officials have cited the gap between the supply of labor and factory resources and the economy's use of them. The Fed's strategy is to raise rates at a pace that is ``neither hasty nor overly attenuated'' to allow the economy to work off slack, Fed Vice Chairman Roger Ferguson said Oct. 29.
Inflation
A rise in personal savings, lingering hesitancy by businesses to spend and hire, and lower levels of government spending may weigh on growth, Ferguson said. Consumer spending rose 0.6 percent in September, three times faster than incomes, suggesting savings will have to rise and consumption fall in coming months.
Fed officials correctly predicted earlier this year that higher energy costs would have limited effects on price measures, giving the FOMC greater flexibility to raise rates slowly. The personal consumption expenditures price index, minus food and energy, rose 1.5 percent through September, within a range of stable prices for those Fed officials who have specified their inflation goals.
``The key to this statement is inflation expectations remain contained,'' said Robert Gay, chief strategist at Commerzbank Capital Markets in New York, after the report. ``Their big fear is not inflation yet.''
Other Central Banks
With today's action, the overnight rate is now equal to the European Central Bank's refinance rate, 0.50 percentage points below the Bank of Canada's overnight rate, and 2.75 percentage points below the Bank of England's base lending rate.
Interest rate differentials are one determinant of exchange rates, and Fed officials have suggested that the dollar is likely to fall if the U.S. trade deficit continues to widen.
The Commerce Department reported today the trade deficit unexpectedly narrowed to $51.6 billion in September as exports of goods and services rose to a record. The dollar fell to a record $1.30 euros shortly after the report because the trade deficit remains near a record.
With today's action, the Fed raised the discount rate it charges banks for direct loans to 3 percent. The rate is linked to the Fed's overnight lending rate target.
The board unanimously approved a discount rate increase requests submitted by 10 regional Fed banks. The San Francisco and Dallas banks did not send the board new rate recommendations, said Fed spokeswoman Michelle Smith.
Last Updated: November 10, 2004 15:57 EST
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