Fed Raises Rate, Holds Out Prospect of More Increases (Update5)
March 28 (Bloomberg) -- The Federal Reserve, beginning a new era
under Chairman Ben S. Bernanke, raised the main U.S. interest rate to
4.75 percent and held out the prospect of further increases.
The quarter-point move is the 15th in a row, the longest stretch of
increases in more than 25 years. The statement on the rate outlook
was unchanged from former Chairman Alan Greenspan's last meeting in
January, while adding more detail on the economy by predicting slower
growth after this quarter.
``Some further policy firming may be needed to keep the risks to the
attainment of both sustainable economic growth and price stability
roughly in balance,'' the Fed said in its statement after meeting
yesterday and today in Washington. ``The run-up in the prices of
energy and other commodities appears to have had only a modest effect
on core inflation.''
The decision marks the first attempt by Bernanke to shape Fed policy
since succeeding Alan Greenspan, who was chairman for almost two
decades. Investors and economists are watching for signs of when the
Fed will end its rate increases and when it will reveal more about
its thinking, which Bernanke has said is one of his priorities.
Treasury notes and stocks fell while the dollar rallied as traders
stepped up bets the central bank will lift its benchmark rate to 5.25
percent. The yield on the 10-year Treasury note rose 8 basis points
to 4.78 percent at 5:02 p.m. in New York. The dollar advanced to
117.89 yen from 116.74 yesterday and the Standard & Poor's 500 Index
dropped the most in three weeks.
Responding `As needed'
The FOMC's unanimous decision lifted the target rate from 4.5
percent, set at the last meeting on Jan. 31, to the highest since
April 2001. The statement said the Fed ``will respond to changes in
economic prospects as needed.''
Fed policy makers kept their assessment that energy prices and labor
costs pose a risk to inflation.
``Economic growth has rebounded strongly in the current quarter but
appears likely to moderate to a more sustainable pace,'' the
statement said. ``Possible increases in resource utilization, in
combination with the elevated prices of energy and other commodities,
have the potential to add to inflation pressures.''
Bernanke and Fed policy makers are trying to balance two risks: Stop
raising rates too soon and inflation may accelerate; go too far and
economic growth may be stunted.
``What they are doing is sending a signal they are no closer to the
end of the tightening cycle than they were at the January meeting,''
said Gerald Lucas, Banc of America Securities chief Treasury trading
strategist, in an interview. ``We have little doubt that the new Fed
is concerned about inflation and, probably more importantly,
inflation expectations.''
Further Increases Predicted
All 105 economists surveyed by Bloomberg News predicted a quarter-
point rise. A separate survey of the 22 primary dealers of U.S.
government bonds last week predicted the Fed will raise its benchmark
rate to 5 percent, the median estimate, by July.
The Fed's move gives the U.S. the highest central bank rate among the
Group of Seven industrial countries, surpassing the Bank of England's
4.5 percent benchmark. The Fed's rate is 2.25 percentage points above
the European Central Bank's refinancing rate and 1 percentage point
higher than the Bank of Canada's overnight rate. The Bank of Japan's
rate is close to zero.
The Fed's cycle of increases has lasted longer than most forecasters
expected: A year ago, economists predicted the rate would be 4
percent this month. The central bank's next two interest-rate
meetings are scheduled for May 10 and June 28-29.
Inflation Concerns
Former Fed governor Susan Phillips said she detected a ``very small''
additional emphasis on inflation concerns in the statement. The
reference to commodities probably includes building materials, which
``have seen some really sizable run- ups.''
``Based on what you see right now, it looks like we're going to see
another quarter point in May,'' said Phillips, now dean of George
Washington University's business school in Washington. ``But, they've
got it hedged in here,'' in case ``things change dramatically.''
Inflation has remained under control this year. The Fed's preferred
gauge, the Commerce Department's personal consumption expenditures
index excluding food and energy, rose 1.8 percent in January from a
year earlier, the most recent data. Bernanke has said he is
comfortable with inflation between 1 percent and 2 percent, and the
FOMC in February predicted the gauge would rise about 2 percent this
year.
`How Much Further?'
``They are not saying they're done,'' said American Century
Investments fund manager Jeremy Fletcher, who manages $1.8 billion of
Treasury inflation-protected securities from Mountain View,
California. ``The question is not are they going to pause at the next
meeting. The question is how much further do they go?''
Bernanke told Congress last month that ``longer-term inflation
expectations appear to have been contained.'' That doesn't
necessarily mean the Fed is finished raising rates. The economy
created 243,000 jobs last month, more than expected, and unemployment
rate remained near a four-year low of 4.8 percent.
Boston Fed President Cathy Minehan said March 20 there is ``some
possibility'' labor costs may rise faster than productivity, which
could lead to faster inflation.
Today's statement said ``ongoing productivity gains have helped to
hold the growth of unit labor costs in check.''
Inflation concerns may be the biggest factor influencing the Fed,
economists said. Bernanke used his first speech outside Washington, a
Feb. 24 address at Princeton University, to make the case that stable
prices are a ``prerequisite'' to achieving high employment and
moderate interest rates. The three goals are mandated by Congress.
Labor Market
A pickup in jobs is helping consumer confidence, which jumped in
March to the highest level in almost four years, the Conference Board
said in a report today.
Economists including former Fed governor Lyle Gramley said the Fed's
statement suggests the central bank may not raise its main rate many
more times.
``It raises the odds that the end is near because of the statement
that growth appears likely to moderate to a more sustainable pace,''
said Gramley, who is now senior economic adviser at Stanford
Washington Research Group in Washington. ``It gives a hint that was
not in the previous release. They hadn't been quite that specific
about the outlook for the economy.''
Fed officials aren't ignoring the effects of past rate increases on
the economy. Earlier this month, San Francisco Fed President Janet
Yellen said she's ``sensitive'' to signs the central bank may
``overshoot'' by raising interest rates too much.
Housing Slowdown
There's already evidence of a slowdown in the housing market.
February sales of new homes dropped 10.5 percent, the most in nine
years, and the average rate on a 30-year fixed mortgage is near a
three-year high. Minehan, speaking to real estate agents last week,
said ``we could be wrong on the magnitudes'' for predictions of a
housing slowdown, which is a ``downside risk to growth.''
The Fed expects the U.S. economy to expand by an inflation- adjusted
3.5 percent this year, up from 3.1 percent in 2005.
``We're starting to see a few signs of areas of concern,'' James
Young, chief executive officer of Union Pacific Corp., the largest
U.S. railroad, said in an interview yesterday, citing building
materials and chemicals. ``I'm concerned we don't go too far, too
fast here.''
Today's meeting was the first for two newly appointed Fed governors:
Randall Kroszner, 43, a former professor at the University of
Chicago, and Kevin Warsh, 35, who advised President George W. Bush on
financial-markets policy.
The statement today said 11 of the 12 regional Fed banks sought an
increase in the discount rate, or the cost of direct loans to
commercial banks, a signal that they wanted an increase in the Fed
target. The discount rate rose a quarter-point to 5.75 percent. The
Kansas City Fed was the lone bank not to submit such a request.
To contact the reporter on this story:
Scott Lanman in Washington at [EMAIL PROTECTED]
Last Updated: March 28, 2006 17:10 EST
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/obrolan-bandar/
<*> To unsubscribe from this group, send an email to:
[EMAIL PROTECTED]
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
