Federal Reserve ready to increase interest rates
Washington — The Federal Reserve is poised to bump up interest rates for the second time in eight weeks in an effort to cool the economy and prevent an outbreak of inflation, private economists believe.
Many analysts have been forecasting another quarter of a percentage point rate increase since Fed Chairman Alan Greenspan vowed last month to move ”promptly and forcefully” at the first signs of inflation.
The Federal Open Market Committee, composed of Fed board members in Washington and the presidents of the Fed’s 12 regional banks, was meeting behind closed doors today to review interest rate policy with financial markets braced for a midafternoon announcement of their decision.
On Monday, Wall Street appeared to take the view that today’s expected rate increase will be all the Fed needs to contain the inflation threat. The Dow Jones industrial average shot up 199.15 points and closed at a new record of 11,299.76.
Economists offered mixed opinions on whether the central bank will boost rates again in the fall as they eagerly awaited the Fed’s announcement, seeking a clue about its possible future action.
”The Fed continues to face the conundrum of a hot economy and cool inflation and the issue they are facing is to what extent they turn up the air conditioning,” said Tim O’Neill, chief economist for the Bank of Montreal and Harris Bank.
Although the economy has slowed in recent months, it is still expected to grow almost 4 percent this year, a brisk pace that has pushed unemployment down to its lowest level in three decades.
While that’s good news for workers, it is worrisome to the Fed, which is concerned that employers foraging for workers are wooing them with higher wages and benefits.
”The Fed is fearful that the economy is expanding too strongly, that labor markets are too tight and that inflationary pressures will develop if things don’t slow down,” said economist Mark Zandi at Regional Financial Associates.
Greenspan would tend to argue that ”small pre-emptive moves now are more appropriate than waiting and being forced to tighten even more later,” said David Jones, economist at Aubrey G. Lanston & Co.
Jones, Zandi, O’Neill and some other economists believe Fed policy- makers will raise interest rates again at their next meeting Oct. 5.
Many analysts see the Fed’s goal this year as taking away some of the stimulus it provided last fall when it cut interest rates three times to counter a growing threat that the Asian crisis could topple the United States into a recession.
Economists were split on whether the Fed will keep its policy directive, which signals the future course of interest rates, at neutral or switch it to one leaning toward raising rates.
On June 30, the Fed nudged up its target for the federal funds rate by a quarter-point to 5 percent, the first increase in two years.
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