Newspaper article The Christian Science Monitor

Why Interest Rates May Rise Further ; the Federal Reserve Meeting Monday and Tuesday May Produce the 15th Consecutive Increase

Newspaper article The Christian Science Monitor

Why Interest Rates May Rise Further ; the Federal Reserve Meeting Monday and Tuesday May Produce the 15th Consecutive Increase

Article excerpt

The Federal Reserve has never raised interest rates 15 consecutive times. But Tuesday, the nation's central bank is expected to hike rates another quarter percentage point - yes, the 15th increase.

If the Fed raises rates, it will move the short-term cost of borrowing money to the highest level since March 2001, just when the economy moved into a recession. However, this time, the Fed is acting at a time when the economy - except for housing - is motoring along at a fairly brisk pace. It is because the economy is so strong that analysts believe Ben Bernanke - who is chairing his first Fed meeting Tuesday - will feel comfortable with continuing the policy of increasing rates by a quarter percentage point.

In fact, such increases will continue at least through the May 10 meeting, economists believe. It's part of an ongoing policy of "monetary gradualism," the equivalent of adding only a few grains of salt at a time to see how something tastes.

"[Mr. Bernanke] has said that raising interest rates gradually is a reasonably good strategy that minimizes the mistake of overshooting," says Anthony Chan, chief economist at JPMorgan Private Client Services in Columbus, Ohio.

The Fed started raising interest rates on June 29, 2004, when short-term rates were 1 percent. By the end of the day Tuesday, the Fed funds rate - the cost to a bank of borrowing money overnight - could increase to 4.75 percent. As this rate rises, consumers who have short-term loans, such as auto loans and credit-card balances, could see their interest costs rise.

Until now, the Fed's rate increases have had minimal effect on the economy, says J. Michael Barron, CEO of Knott Capital, which manages funds in Exton, Pa. "But we feel that will start to change and the economy will start to slow significantly."

One of the first signs of a weakening economy came on Friday, when the Commerce Department reported that February sales of new homes fell 10.5 percent, the steepest drop in nine years. Inventories of unsold homes rose to a record 548,000 units. The rising inventories helped put pressure on median prices, which dropped 1.6 percent from January to $230,400.

However, the housing picture is not totally negative. Last Thursday, the National Association of Realtors reported that the sales of existing homes rose by 5.2 percent, after dropping for the prior five months.

The future direction of the housing market is likely to be one of the special topics discussed at the Fed meeting - which was stretched to two days (Monday and Tuesday) at the request of Bernanke, says Lyle Gramley, a former Fed governor.

Mr. Gramley, now a consulting economist at Schwab Washington Research Group, says the Mortgage Bankers Association's weekly application index is now at its lowest level of the year, yet another indication of the sector waning. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.