Fed Raises Interest Rates

Posted on March 28, 2006

The Wall Street Journal reports that the Fed raised interest rates again and signaled that this may be only the beginning of another series of interest rate hikes.

The Fed raised its target for the federal-funds rate, charged on overnight loans between banks, to 4.75% from 4.5%. In a statement released after the two-day meeting ended Tuesday, the Fed said: "Some further policy firming may be needed to keep" the risks to both growth and inflation "roughly in balance," identical to language in the statement released after Mr. Greenspan's last meeting, on Jan. 31.
Bond and stock prices declined on the announcement, reflecting investors' increased certainty that more rate increases lie ahead. It was the Fed's 15th consecutive quarter-point rate increase since it began to raise rates from a then-46 year low of 1% in June, 2004.
Mr. Bernanke was sworn in as chairman Feb. 1 and Tuesday was the first meeting of the policy-setting Federal Open Market Committee that he chaired. In his confirmation hearings he pledged "continuity" with Mr. Greenspan's policies, and the similarity of the FOMC's actions and words to those on Jan. 31 may have in part reflected that priority.
"Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace," the statement said in its most notable difference from Jan. 31. The inclusion of the Fed's view of where growth is going may reflect Mr. Bernanke's desire to more clearly demonstrate how the forecast is influencing monetary policy.

This is great news for anyone who has a jumbo CD they're about to roll over, but not such good news for Americans with credit card debt. It's also not such good news for the housing market, which is starting to show some signs of a slowdown.

Another reason that the Fed is signaling more interest rate hikes may the fear that China will move its reserve of American dollars into euros. The UAE has already said that it will move 10% of its dollar reserves into euros, because it's unhappy with the American resistance to the Dubai Ports deal. Raising interest rates will help prop up the dollar, which may be part of what's really going on here.