For the 12th time in a little more than a year, the nation's central bank voted to raise short-term interest rates in an effort to slow inflation by slowing down the overall economy.
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The Federal Reserve Board's monetary policy committee voted to hike a key short-term rate—the federal funds rate (which banks charge one another on overnight loans)—by a quarter of a percentage point to 4 percent. At the start of 2004, that rate had been as low as 1 percent.
Yet a recent survey of money managers by the brokerage firm Merrill Lynch found that many now expect the Fed to keep jacking up rates at least until current Fed chairman Alan Greenspan retires on January 31. The bond market is predicting that there is a growing chance the Fed could hike rates once more in its first monetary policy meeting under new Fed chairman Ben Bernanke (if he wins Senate approval) in March.
If that should come to pass, the federal funds rate could be as high as 4.75 percent by the end of the first quarter of 2006. That, in turn, would pressure the bond market to push up yields on long-term government bonds above 5 percent, which in turn could send mortgage interest rates higher.
In making its decision, the Fed conceded that the economy is by itself slowing down partly as a result of economic disruptions caused by the hurricanes that crashed into the Gulf Coast. But the Fed described those as only temporary speed bumps. In its statement, the central bank noted that "monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas."
The fact that the economy is expected to continue to expand while core inflation (excluding volatile energy and food costs) remains under control—for now—gives the Fed time and the wherewithal to raise rates gradually and methodically.
Of course, should new data show that inflation is growing out of control, the Fed has the power to raise rates more aggressively.
Biz Buzz wraps up the day's market news and offers an agenda of upcoming economic news.
