With a fall in oil prices easing inflation concerns, the Federal Reserve is expected to continue its easy-does-it approach to raising interest rates, boosting a key rate by a moderate...
WASHINGTON With a fall in oil prices easing inflation concerns, the Federal Reserve is expected to continue its easy-does-it approach to raising interest rates, boosting a key rate by a moderate quarter-point today at its final meeting of the year.
Many analysts believe this pattern of gradual quarter-point rate increases will continue well into the new year.
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Solid economic growth and an absence of inflation pressures mean Federal Reserve Chairman Alan Greenspan and his colleagues can take their time in moving up from exceptionally low interest rates.
“The essential picture the Fed sees is a well-balanced and sustainable economic expansion. It has the leeway to continue its measured steps,” said economist David Jones, author of four books on the Greenspan Fed.
The federal-funds rate, the interest banks charge on overnight loans, is at 2 percent, up from a 46-year low of 1 percent, where it stood before the Fed began nudging rates higher June 30.
Short-term consumer rates have been rising at the same gradual pace. Banks’ prime-lending rate, the benchmark for millions of consumer loans, is at 5 percent, up from a 46-year low of 4 percent before the Fed increases.
Even with a rate increase today, the funds rate and the consumer rates tied to it will still be at historically low levels
The Fed has said it is trying to gradually raise the funds rate to a “neutral” level where it is neither promoting stronger economic growth nor depressing growth.
Many economists believe that level would be somewhere between 3 and 4 percent.
When oil prices were above $55 per barrel in October, some analysts said the Fed would accelerate its rate-tightening moves if it appeared the big jump in energy prices threatened to push overall inflation rates higher.
However, oil prices have retreated from those highs, trading at around $41 per barrel currently, a move that has helped ease inflation fears.
On the growth side of the ledger, there had been concerns earlier in the fall that a sputtering job market would force the Fed to put increases on hold. But October job growth surged by 303,000, and the November figure, while lower, showed a still respectable increase of 112,000 jobs.
Analysts said the Fed will continue monitoring the economy and keep nudging rates up slowly as long as job growth continues and inflation remains moderate.
“What the Fed does will depend on what the inflation and employment numbers do from month to month,” said David Wyss, chief economist at Standard & Poor’s.
All analysts said they expected little change to the Fed’s statement explaining its actions. They looked for the central bank to continue to pledge to move at a “measured” pace in raising interest rates and to express a belief that the risks to the economy going forward were equally balanced, giving equal weight to the possibility that growth would be slower or that inflation might be higher than expected.
The Bond Market Association predicted yesterday the current 2 percent federal-funds rate will be at 3.5 percent by the end of next year, with today’s expected increase the fifth in the series to be followed by five more.
These modest increases will allow the economy to keep growing next year at an annual rate of 3.7 percent, down only slightly from this year’s expected 4.4 percent increase, the Bond Market’s economic-forecasting panel said.
Because rate increases have so far been gradual, there has been little impact on long-term interest rates such as mortgage rates.
In fact, after hitting a high for the year of 6.34 percent in early May, 30-year mortgages have been trending lower as the bond market responded to the economy’s pronounced summer soft patch, reflecting the adverse impact of higher oil prices.
Last week, Freddie Mac reported that the national average for 30-year mortgages had fallen to 5.71 percent.
Jones said he believed, even with further Fed rate increases, 30-year mortgage rates should still be 6 to 6.5 percent at the end of 2005.