Fed Raises Key Rate, Leaves Options Open
By Knut Engelmann 15:32 06-30-99
WASHINGTON (Reuters) - The Federal Reserve nudged a key interest rate higher Wednesday, sending a modest signal that it is worried about economic overheating, but left open whether more rate rises might be needed in the future.
Following market expectations, the Fed said it had raised its target for the federal funds rate, which determines borrowing costs throughout the U.S. economy and beyond, by a quarter-percentage point to 5.0 percent. It left the less frequently used discount rate unchanged at 4.5 percent.
But in a surprise to financial markets, the Fed said it had dropped its leaning toward higher rates in the future and instead adopted a neutral stance, suggesting it is leaving its options open as to where rates should be going in the future.
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Financial markets had widely expected the Fed to stick with its so-called tightening bias, fearing the central bank would follow this increase in borrowing costs with more rises later this year to cool off the booming U.S. economy.
''Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC (Federal Open Market Committee) has chosen to adopt a directive that includes no predilection about near-term policy action,'' the Fed said in a brief statement.
But the Fed pledged to keep a close eye on the economy for any signs of future inflation prompted by the nation's tight labor market and strong consumer demand.
''The committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth,'' the Fed said.
Explaining its first rate rise in more than two years, the statement echoed previous remarks by Fed Chairman Alan Greenspan that some of the rate cuts the central bank had administered last year might no longer be appropriate.
The Fed cut the fed funds rate three times, by a total of three-quarters of a percentage point, late last year to protect the U.S. economy from a global financial crisis.
Financial markets reacted with relief that the Fed had not signaled a greater willingness to raise rates more aggressively in the future.
The U.S. bond market rose, with the benchmark 30 year bond standing 14/32 higher to yield 6.04 percent compared with trading 5/32 lower with a yield of 6.08 percent shortly before the announcement.
The U.S. stock market rallied, with the Dow Jones Industrial Average rising by as much as 1.3 percent. Previous to the Fed's announcement it had languished in slightly negative territory.
''There is no reason for the Fed to be embarking on a series of tightening moves. The Fed has finally acknowledged that. This rate hike was purely an insurance policy,'' said Scott Grannis, chief economist at Western Asset Management. |
