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Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 8-24-1999 Fed boosts interest rates CNN Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation CNN, "Fed boosts interest rates" (1999). YPFS Documents (Series 1). 12815. https://elischolar.library.yale.edu/ypfs-documents/12815 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. S SE E ilP i tP i tViView a NEWS > EconomyFed boosts key rate againAugust 24, 1999: 4:59 p.m. ETCommittee raises fed funds, discountrate by quarter point to cool growth By Staff Writer M. Corey GoldmanNEW YORK (CNNfn) - The Federal Reserveraised short-term interest rates by a quarterpoint Tuesday - a move meant to slow theresilient U.S. economy and keep inflationaway - and dropped a subtle hint thatanother rate rise may not happen so quickly.      As expected, the Fed hiked the fed funds rate -- the target ratecommercial banks lend to each other overnight -- to 5.25 percent,the second quarter-point increase in two months. The less-tinkered-with discount rate -- the rate at which the Fed's 12 district bankslend directly to financial institutions -- was increased to 4.75percent from 4.5 percent.      It was the first time since April 1994 that the Fed opted to raisethe fed funds rate at two consecutive Open Market Committeemeetings and the first time since February 1995 that it moved thediscount rate -- a sign that it wants to keep inflation in check. Atthe same time, the policy-making committee announced its decisionto keep its bias neutral toward future rate actions, hinting thatanother rate move isn't necessarily imminent.      "It's a signal to the market that the Fed means business here,"said Paul Hancock, a portfolio manager with Investors Group Inc. inWinnipeg, Manitoba. "It suggests the Fed is being tough on keepinginflation away but it also suggests they're willing to wait to see howthings go before the move a third time."     Hardline approach     Stocks and bonds, which immediately shot out the gatefollowing the announcement, gave back much of their gains asinvestors concluded that a third rate rise before year's end is still apossibility. The benchmark 30-year Treasury rose more than 1/2 apoint, pushing its yield to 5.95 percent. The Dow Jones industrialaverage rose more than 45 points to 11,348 before sliding back intonegative territory, ending the day down just 16 points.      The rate rise comes in the wake of economic reports showingpersistently strong U.S. growth, but little actual inflation - thenemesis of the stock and bond markets. It also follows on the heelsof a series of rate reductions that some economists believe the Fedis now taking back.      "From my perspective it leaves the door open to further ratehikes," said Dick Berner, senior economist with Morgan StanleyDean Witter in New York. "Remember: the Fed is taking back whatthey gave last year, which suggests they will raise rates one moretime and then see what to do after that."    Alan Greenspan and the Fed are determined to keep inflationat bayAt its June 30 meeting, the Fed raised the federal funds rate by aquarter percentage point, but adopted a neutral stance on futurerates and left the discount rate unchanged. At Tuesday's meetingthey kept the neutral bias but raised the discount rate - an inflation-cutting move also done to keep the spread between the two ratesfrom widening.       With financial markets behaving "more normally," withpersistent strength in consumer demand, with an extremely robustjob market and with international economies showing signs ofrenewed vigor, "the degree of monetary ease required to addressthe global financial market turmoil of last fall is no longer consistentwith sustained, non-inflationary economic expansion," the Fed saidin its prepared statement.      Taking it back     In September 1998, the Fed embarked on a series of interestrate reductions designed to propel U.S. growth in the face ofeconomic turmoil overseas. It reduced the fed funds rate threetimes to 4.75 percent from 5.5 percent and the discount rate to 4.5percent from 5 percent.    Short-term interest rates have been climbing slowlySince then the U.S. economy has taken off. Wages have risen,imports have surged and personal spending has taken off.Economies in the Far East and Europe are showing signs of recoverytoo. Even South America's economic outlook has improved, despitereports this week that Ecuador may need additional time to paysome interest owing on part of its outstanding debt.       The more pressing issue for financial markets now, it seems, iswhether more rate increases will be on the Fed's agenda down theroad, particularly in October and December, or whether this secondtap on the brakes is enough to slow the U.S. economy and keepinflation under wraps.      "Today's increase in the federal funds rate, together with thepolicy action in June and the firming of conditions more generally inU.S. financial markets over recent months, should markedlydiminish the risk of rising inflation going forward," the Fed said.      "The markets are assuming that the Fed are finished tighteningfor the year," said Sherry Cooper, senior economist with brokerageNesbitt Burns Inc. "That presumption might prove to be premature.We, and the Fed, will wait and see."     Another one coming?     To be sure, the Fed is protecting consumers and financialmarkets from something it has yet to see - a substantial rise ininflationary pressures. Inflation rose at a tame 0.3 percent pace inJuly after ringing in flat for both June and May. And economicgrowth slowed to a 2.3 percent annual rate in the second quarterfrom a 4.3 percent pace in the first.      And higher interest rates - in the form of higher mortgage rateswhich are linked directly to the bond market and higher loan andcredit rates which are linked more to Fed policy -- will undoubtedlylead consumers to sobering second thoughts when deciding on theirpurchases, slowing the economy down even more, analysts said.      Financial institutions typically follow the central bank's actionson rates, raising or lowering their prime lending rate in tandem withwhat the Fed determines they can charge to lend money.      Late Tuesday, Wells Fargo (WFC) announced plans to raise itsprime rate by a quarter point to 8.25 percent, effective Wednesday.      All that may work to slow the economy down and keep inflationin check, according to analysts and economists. "The question iswhether it would do that on it's own and the Fed seems to be tellingus they don't think so," Berner said.      Reports on the U.S. economy will now be the focus for financialmarkets in the weeks ahead as investors look for more evidencethat the economy is slowing and that inflation remains tame.      The National Association of Realtors Wednesday releases dataon existing home sales and the Commerce Department releases itsfigures on durable goods orders. On Thursday, the CommerceDepartment releases revised GDP numbers and on FridayCommerce will release July personal income and spending figures.      "The markets seem to be interpreting this as the last tighteningbefore year's end, and that may or may not be true," said InvestorsGroup's Hancock. "If we continue to see signs of growth and worse,signs of inflation this could be second of a series. If not, then thiscould be the last rate rise for a while." Sa Save  E Emai  Pr Printe  V View a li    RELATED STORIESSpecial Report: Eyes on the FedFed hikes key rate - June 30, 1999One Fed move or more? - June 30,1999  RELATED SITESFederal ReserveNote: Pages will open in a newbrowser windowExternal sites are not endorsed byCNNmoneyContact UsClosed CaptioningSite MapMost stock quote data provided by BATS. Market indices are shown in real t ime, except for the DJIA, which is delayed bytwo minutes. Al l  t imes are ET. Disclaimer. Morningstar:  Â© 2018 Morningstar,  Inc. Al l  Rights Reserved. Factset:  FactSetResearch Systems Inc. 2018. Al l  r ights reserved. 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Fed boosts interest rates

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