Central Bank Raises Short-Term US Interest Rates Again

whiteman

By Barry Wood
Washington
29 June 2006

The Federal Reserve, the US central bank, Thursday raised short-term interest rates for the 17th consecutive time since 2004. The quarter point increase, to 5.25% is intended to slow the economy and combat inflationary pressure.



Following the announcement, financial markets bid stock prices sharply higher, dramatically strengthening a rally that had begun earlier in the day. Market participants are relieved that the Federal Reserve statement contains language suggesting that the cycle of interest rate increases is coming to an end. Bob McTeer, who recently retired from heading the Federal Reserve Bank of Dallas, says since rates have risen by four percentage points in two years, the central bank should not raise rates at its next meeting in August.

\"We must remember that monetary policy operates with a lag [up to 15 months], so we haven't yet seen the full effects of the interest rate hikes that have taken place already,\" said Bob McTeer. \"We do have some emerging weakness [in the economy] as well as higher inflation to be concerned about. So I see no reason to keep going on without some pause.\"

Short-term rates are now at their highest level in four years. Higher interest rates mean higher monthly payments on credit card debt and loans that carry a flexible interest rate.

Earlier Thursday the Commerce Department reported that the US gross domestic product advanced at a revised 5.6 - percent rate in the first quarter. That is a significant upward revision and brings growth to its highest level in over two and a half years. However, there are clear signs that under the weight of previous interest rate increases growth has slowed in recently.

Worldwide, inflationary pressure has risen because of the doubling of oil prices over the past two years. The principal monetary policy tool for cooling inflation is higher interest rates-which boost the cost of credit and thus depress the economy. It is harder for price increases to take hold when growth is slowing as there is less upward pressure on wages.