Federal Reserve Raises Rates 1/4%

[OrangeCountyDemocrat]

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.

The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.

In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5-3/4 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, Dallas, and San Francisco.

[corporate_mike]

1. 15th consecutive quarter-point increase

[pitohui]

2. good, and badly needed too

plenty of retirees were down to catfood when CDs were paying a measly 1-3/4 annual interest

personally it could go up a little more if done gradually if you ask me

you want people to save money then you gotta give em the ability to earn money on their savings

also a higher interest rate could slow galloping house prices, many buyers shop by the size of the note, if interest rate is a little higher, selling price of house has to be a little lower, then if the buyer ever gets a larger salary or even an inheritance, then they can pay off more principal and the house is theirs instead of the bank's that much sooner

[Zynx]

9. By that logic why don't we just raise interest rates to 10%?

Sure, you'll earn great money on your little savings account, but the recession that throws your ass out onto the street may become a bigger concern.

I'll concede interest rates were far too low in 2002 and 2003, but now we are getting too high. The primary concern of our economy is not fixed income investors on CDs. If we made interest rates high just to benefit them, we would suffer a recession in the short term and badly constrict our economic growth rate in the long term as long term investment would become unattractive and expensive due to a lack of interest in the financial markets.

[progressivebydesign]

3. God those people are stupid.

Let's just kill off the housing and construction industry entirely... and be done with it. You know.. construction was one of the last few jobs that couldn't be outsourced. The crotch-grabbing denial of the shit economy is what causes these ridiculous interest rate raises. Inflation? Bullshit.. artificially high gas prices, and only defense industries showing any real gains, THAT does not make a robust economy. New housing sales fall into the toilet?? yeah... raise the interst rates. Can those people do anything right? Or is it ALL to enrich the bankers and financeers that back Bush?? idiotfucks.

[ixion]

4. did the same thing to the dot com boom in '98

absent ANY inflation, Greenspin raised it continually, claiming to want to 'head off' inflation, which effectively kiilled the venture capital that was powering the dot com boom.

[pitohui]

5. er, construction is outsourced my friend

look around you, it's illegals getting those jobs now

we need the raise in interest rates, inflation is killing us, groceries, fuel, etc. are through the roof, if people save money at these low interest rates it is throwing money in the garbage can because every day the dollar loses value to inflation

you MUST have a fair interest rate or people cannot save money in secure places like CDs, savings accounts, etc

the comment below on how high interest rates supposedly collapsed the dot com boom says it all, we should never be in the business of forcing people to invest in risky venture capital schemes to begin with, the average american has a very limited income expectation and can't afford to lose money by investing in risky investments, before we worry abt keeping interest rates low to help out the venture capitalist and the contractor with his crew of illegals, what say we think about the retirees who were eating cat food when CDs were paying at 2 percent in 2002?

let 'em throw us little people a bone once in awhile, please! the multi-millionaire developer can ride out not building quite so many mcmansions this year, thank you verra much

[Zynx]

7. You speak very derisively of the capital markets that have been

the major engines of growth for our economy for decades. Sure, fixed income assets need some kind of decent return, but 6% is far too high since the interest rates on loans that go along with that push 9% and price people out of credit.

If we want to boost the long term economic growth rate of this country, it is important people have singificant amounts of money in the equity and credit markets, otherwise it is too expensive for businesses to raise capital to finance investment. Traditional prime lending rates are far too high in the environment you advocate to spur economic growth.

[Zynx]

8. Higher interest rates SLAUGHTER banks.

1. Loan demand drops
2. Interest rate spreads decrease, crushing margins

Let's put it this way, you do not want to be owning bank stocks in a rising interest rate environment. This is not for the bankers. This helps no one except fixed income investors and savers.

[sendero]

10. Ok...

.... who should get slaughtered? Banks, people borrowing money or people with savings?

Hopefully none of the above, but the facts are pretty undeniable.

1) The real inflation rate is running somewhere between 6-8%. With savings returning 3% how is that fair>

2) The inflationary pressures on this economy are enormous. Between the cost of oil, which affects nearly everything, and the value of the dollar, which WILL be dropping against other currencies - we are in a pickle.

A 1/4 point rate increase is not the end of the world. The Fed cannot pump absurd number of dollars into this economy indefinitely.

[Zynx]

13. The inflation you speak of, which is not anywhere near as bad as you

say for most people, is not influenced by higher economic growth. If you speak of the housing market in there, that is in the process of being corrected and we can see it happening already. Health insurance and energy costs have been rising independent of economic growth.

I'm sorry but our primary concerns can't be those who only earn income on savings accounts rather than long term bonds and equities. If we put our emphasis on short term savings over long term investment, our long term economic growth rate will fall drastically. We can supplement the elderly who only have fixed income through Social Security. Long term interest rates should not be any higher than they are now for our long term economic health. They shouldn't be much lower either. The Fed moves rates around too much.

[sendero]

17. Almost..

... everyone with any credibility agrees that the real inflation rate experienced by average Americans is in the 6-8% range. Do not be fooled by the well-cooked government numbers that overweight everything that falls and underweights everything that rises.

My concern is not for coupon clippers. My concern is for the economy as a whole. You think poor people are immune to the effects of inflation? No way, almost their entire income goes to the things that are rising out of control, food and energy (the "volatile" sectors, which is gov't speak for "rising").

For someone to complain about 4.5% rates after years of historically low rates is not realistic. the rates could not stay at 2% forever, and frankly if you think they are going to stop here well here's my guess - only if the economy falters seriously will they stop here.

Interest rates should be a couple points higher than inflation. Any time they are not, whether it be lower or higher, you have an aberrant situation that cannot by definition last.

You want lower rates? Figure out how to get rid of inflation.

[skids]

11. Rock and a hard place.

If they were to keep the rates low, the dollar would crash and the housing market would continue to work it's way out on the thin ice over deeper and deeper water. Yes, it's going to hurt -- bad -- but the longer it gets put off, the worse it will hurt and it just simply cannot be put off forever The dollar was only worth 1.15 loonie just a few short weeks ago, for example, and hasn't shown any sign of going back up into the 1.18-1.20 area in some time.

It's all a moot argument though because the economy is so far out of whack that nothing they do really matters. It should have been done years ago before we got ourselves in this position, but Greenspan wanted to make Bush look good.

Eventually there will be a huge implosion. Some think it will be an intentional dollar crash (debt "monetization"), allowing the U.S. to stiff foreign investors by paying them back in worthless paper, in which case these rate increases are just buying time to get all the ducks in a row. Other types of crashes could also be delayed in various manners in order to stick the next president with the blame. About the only thing one can do to protect oneself is to get out of debt and secure some solid assets that have some level of added utility.

[sendero]

12. "secure some solid assets that....

.... have some level of added utility"

Exactly.

Might I recommend firearms and ammunition. A bullet that will kill an edible critter will have real intrinsic value in the coming debacle :)

[skids]

22. Actually I might suggest also an air/pellet gun.

Or a coil gun, though I don't think you can buy those you have to make them.

Something that will be super-easy to find ammo for but can still take out a squirrel :-)

[Zynx]

15. The dollar needs to correct long term to shrink our trade deficit.

Eventually we will not attract enough money to plug a 7% of GDP whole in our current accounts. We are already seeing the foreign direct investment environment for the US deteriorate. The dollar must fall.

[clar8130]

18. agree

I'm hoping a gradual rise in interest rates will deflate the housing bubble instead of causing it to burst into shreds. A big POP would put massive pressure on Fannie Mae and some banks. I'm hoping a long slow HISS will allow them to minimize their losses somewhat.

[sendero]

19. It won't be a POP or a HISS..

.. it will be a fart and it will stink up the entire economy.

[clar8130]

20. LOL!

It will stink, that's for sure! But a bad recession would stink less than a complete currency collapse!

[pinniped]

6. Cool, I was getting tired of my old interest rates anyways.

.

[skids]

14. Well, if it's a normal savings account, don't hold your breath.

If you're looking for your savings account interest to increase, don't bother. You pretty much have to take out a CD or go shopping for an account with better rates -- banks aren't about to raise it. There aren't enough people saving money these days to make a fuss about it, so expect 1% and lower interest rates on normal savings account to stay that way.

[pinniped]

16. I was referring to the plastic.

Just when I get these bastards to lower it, poof, it goes back up again.

It's like Don Corleone constantly getting pulled back in.

[Raine]

21. Good

I'm sick of putting my money in the bank and getting nothing for it.