Fed Boosts Rates Again
April 10, 2006 — -- The Federal Reserve's Open Market Committee voted to increase a key interest rate today by a quarter-point, the 16th time since June 2004 that the Fed has voted to raise rates.
This means that the fed funds rate -- which is what banks pay for overnight loans -- now stands at 5 percent. The last time the rate was set higher was March 2001.
The move was expected, but market watchers hoped that the Fed would commit in its post-meeting statement to a pause in rate hikes in June. They didn't get their wish.
The Fed governors gave the markets a two-sided look in their write up.
The Good:
- Economic growth has been strong this year.
- A cooling housing market and reduced consumer spending (thanks to high gas prices and rising interest rates) have taken the economy to a more "sustainable pace" of growth.
- So far, high energy and other commodity prices don't seem to be pushing inflation to dangerous levels.
The Bad:
- There are real risks that inflation could break out of this not-too-hot, not-too-cold environment. (Think big price hikes because of another spike in oil prices or significant increases in the price of manufactured goods because metal costs more.)
The governors left the door open to continued rate hikes by telling the markets that they would focus on the upcoming economic data. People will likely see what they want to see here. The next meeting is scheduled for June 28 and 29.
A fuzzy post-meeting statement is likely to lead to mixed results on Wall Street in the coming days. Expect the regular economic reports to have a more pronounced effect on stocks as traders react to what each report says about inflation.
If jobs growth remains relatively cool, the price indexes show continued moderate upticks in their "core" readings, and retail sales grow at a relatively slow pace, we could see continued green arrows on the markets. If any one of those indicators goes higher than expected, people will probably start selling in anticipation of more interest rate growth.
The fed funds rate affects many consumer credit vehicles (like credit cards and home equity loans). Prime rate, a measure many consumers are familiar with, moves in lockstep with the rate changed by the FOMC today.
According to data from CardWeb.com, variable rate credit cards have increased from 11.58 percent before the fed started hiking rates, to 16.02 percent today, a true measure of how these hikes are passed through to the person on the street.
Other "big-ticket" credit items -- like mortgage rates and student loans -- will not be directly affected by today's decision, as they tend to move in the same direction as the fed funds rate.
Definition: The federal funds rate is the interest rate charged for overnight loans between banks.
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