Fed Expected to Keep Raising Interest Rates
Economic analysts believe the Federal Reserve Board will raise interest rates another quarter point today and will continue to do so for some time, in response to moderate growth in the economy.
The Federal Reserve, responding to solid growth in the economy after a brief slowdown early in the year, is expected to keep raising interest rates. The Fed’s credit tightening campaign will keep mortgage rates and other consumer interest rates rising as well but at a pace that should slow only modestly the nation’s booming housing market, private economists believe.
Federal Reserve Chairman Alan Greenspan and his colleagues are meeting Tuesday to discuss what to do with interest rates. There was a widespread expectation that the Fed will raise interest rates by a quarter-point. That would be the 10th consecutive increase in the Fed’s target for the federal funds rate, the interest that banks charge each other.
The move would push the rate to 3.5 percent, the highest level since August 2001 and more than triple the 46-year low of 1 percent that was in effect before the Fed started raising rates in June 2004.
Although economists once expected the Fed to pause for awhile in its rate hikes, many now believe the central bank will keep pushing rates higher at each of the remaining three meetings this year, leaving the funds rate at 4.25 percent by year’s end. “I think it will be steady as she goes, a quarter-point at each meeting,” said David Wyss, chief economist at Standard & Poor’s in New York.
The reason for the change of opinion has been an economy that is showing new vigor after a slowdown in the early spring. Overall economic growth, as measured by the gross domestic product, came in at a solid 3.4 percent rate in the April-June quarter, and many analysts believe it is growing at an even faster pace in the current quarter.
Considering the devasting impact this will have on those with adjustable rate mortgages, those trying to buy or sell homes, one would think the Fed would have a compelling reason for continuing to jack the rates up. If they do, it would be great if they would share it with the rest of us.
The best I can figure is that, as many senior military and foreign policy leaders are still haunted by the spectre of Vietnam, many senior economists are still fixated on the runaway inflation of the 1970s. Certainly, the Fed’s tight monetary policy since then, under Paul Volker and then Alan Greenspan, has helped wring inflation out of the economy. But the economy has been stagnant or moderate since the bursting of the stock market bubble in the late 1990s. Inflation, outside of the volatile energy secter, is virtually non-existent. Making the economy swim upstream, and making home ownership more difficult for millions of Americans, seems an awfully high price to pay “just in case” inflation comes back.