I must note for archives Fed Funds increased 50 basis points and same for discount rate - Bloomberg:
quote.bloomberg.com
Top Financial News
Tue, 16 May 2000, 11:45pm EDT
Fed Raises Lending Rate to 6.5%; Sees Inflation Risk (Update4)
By Noam Neusner
Washington, May 16 (Bloomberg) -- Federal Reserve policy-
makers raised the overnight bank lending rate by half a point to
its highest level in nine years and said the U.S. economy faces
the threat of rising inflation. That suggests even higher interest
rates as soon as next month.
The increase in the overnight rate to 6.5 percent was the
sixth since June by the Fed's Open Market Committee. Stocks and
Treasury securities rose on investor optimism that the central
bankers' actions will keep prices in check.
Bank of America Corp. and other lenders followed by boosting
their prime lending rates half a point to 9.5 percent. That's the
Fed's aim: Higher costs for car loans, mortgages and home equity
loans are designed to rein in economic growth.
``It's going to take much higher rates to slow this economy
down, pull consumers out of the stores and kick them off their
e-tailing PCs,'' said Chris Rupkey, senior financial economist at
Bank of Tokyo-Mitsubishi Ltd. in New York.
Fed Chairman Alan Greenspan and other FOMC members justified
the rate rise by saying in a statement that ``increases in demand
have remained in excess of even the rapid pace of productivity-
driven gains in potential supply.''
The central bankers went further than previous rate-increase
announcements by adding this time they are concerned the
``disparity in the growth of demand and potential supply will
continue, which could foster inflationary imbalances that would
undermine the economy's outstanding performance.'' That suggests
another interest-rate increase as soon as their next meeting June
28 and perhaps again in August.
Stocks Rise
Analysts saw today's half-point increase as a confirmation by
Greenspan that a policy of gradual, quarter-point increases wasn't
doing enough to cool an economy that expanded at a 5.4 percent
annual rate in the first quarter. ``Those holding their breath for
the Fed to be done tightening may turn blue,'' said Diane Swonk,
chief economist at Bank One Corp. in Chicago.
The Nasdaq Composite Index rose 110 points, or 3.1 percent,
to close at 3717.53. The Dow Jones Industrial Average rose 127
points, or 1.2 percent, to close at 10934.57. And the Treasury's
10-year note rose 1/8 point, pushing down its yield 2 basis points
to 6.42 percent.
The economy's growth rate topped 5 percent in each of the
last three quarters, the first time that's happened since 1983-84.
That's also about 2 percentage points faster than what most
central bankers have said is possible without triggering a pickup
in inflation.
``The growth rates we've seen in the last couple of quarters
in my view are unsustainable,'' San Francisco Fed President Robert
Parry said this month. ``And, if they were to persist at those
high rates, I think it would cause problems.''
Election-Year Question
The nation's workforce grew by almost three million in the
last 12 months to a record 131.1 million, pushing down
unemployment to a 30-year low of 3.9 percent last month. Consumer
spending also grew in the first quarter of this year at the
fastest pace in 17 years, while labor costs rose during that
period at the quickest rate in 10 years.
While the Fed's statement about inflation risks indicates
more interest-rate increases in coming months, it's far from a
certainty. Central bankers may be reluctant to continue raising
rates in an election year, when the economy's performance can
determine the winner.
``It will be just this shot in the arm and finish up by
August, which will take them out of the election process,'' said
Kevin Flanagan, an economist at Morgan Stanley Dean Witter in New
York.
The Fed's Board of Governors also voted to raise its more
symbolic discount rate on loans to banks from the Fed system by a
half point to 6 percent. Although few banks borrow directly from
the Fed to meet their cash reserve requirements, the central bank
generally keeps the discount rate within 50 basis points of the
overnight rate.
April CPI Unchanged
Fed officials have repeatedly warned that too-strong growth
will eventually lead to accelerating inflation. In April, the
consumer price index was unchanged and rose 0.2 percent when food
and energy are excluded, the Labor Department reported today.
While the increase in the so-called core rate was just half
the 0.4 percent rise of a month earlier, the overall consumer
price index is on track to increase 4.3 percent this year. If
sustained, that would be the largest consumer price rise since
1990.
A separate inflation gauge watched closely by the Fed, the
personal consumption expenditure price index, rose in the first-
quarter at the fastest pace in almost six years.
There are indications that more price increases are on the
way. One-quarter of small businesses raised prices in April,
compared with 7 percent that lowered them, according to a survey
by the National Federal of Independent Businesses, a small-
business lobbyist group released earlier this week.
Passing Along Costs
Crude oil prices have been rising since mid-April and oil for
June delivery rose briefly today above $30 a barrel on the New
York Mercantile Exchange for the first time since early March.
Businesses are attempting to pass along to consumers
increases in fuel costs from earlier this year. FDX Corp.'s
Federal Express, the largest U.S. overnight-delivery company, last
month boosted its rates 1 percent, just two months after another
price increase.
And Nabisco Holdings Corp. announced this week that it will
raise U.S. prices by an average of 2 percent on select cookies and
crackers in the second half to pay for higher labor and fuel
costs. It was the first such price increase since October 1998.
Such evidence prompted Dallas Fed President Robert McTeer on
May 1 to say inflation has ``been showing signs of resisting
arrest.''
The Fed's five prior quarter-point rate increases also
haven't cooled new home construction, even though the average
interest rate on a 30-year fixed-rate mortgage rose to 8.52
percent last week from about 7.1 percent a year ago. Today the
Commerce Department reported that construction starts on new
houses and apartments rose 2.8 percent in April.
Still, there are signs that the economy isn't running on all
cylinders. Retail sales fell in April for the first time in a year
and a half. And U.S. stocks, whose rise from early November until
mid-March prompted Fed concerns about a potential inflationary
trigger, have cooled off.
The Nasdaq index fell 16 percent in April and 3 percent in
March, the first consecutive monthly declines since July and
August 1998. The Dow has fallen 7 percent from its high set in mid-
January.
The last time the Fed's target rate on overnight loans
between banks was as high as 6.5 percent was in January 1991, and
the last time central bankers raised their target rate by a half
percentage point was February 1995.
Fed Funds Futures
Trading in federal funds futures contracts, which are a gauge
of where investors expect the Fed to set the overnight bank rate,
showed they were counting on a half-point increase today and at
least one more quarter-point increase by August.
Since the Fed first signaled last May that it would start
raising interest rates, the yield on 10-year U.S. A2-rated
industrial bonds, a measure of corporate borrowing costs, has
risen to 7.98 percent from 6.32 percent, roughly in line with the
Fed's own moves -- including today's.
Greenspan has said the Fed will generally ratify such market
movements, as policy-makers see the higher cost of capital as a
natural result of rising demand from businesses.
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Best Regards, J.T. |
