Business Special Report: Federal Reserve
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  • Fed Raises Rates, Adopts Neutral Bias

    Alan Greenspan/Reuters
    Federal Reserve Chairman Alan Greenspan. (Reuters)
    By John M. Berry
    Washington Post Staff Writer
    Tuesday, November 16, 1999; 3:45 p.m. EST

    Federal Reserve policymakers, concluding that U.S. economic growth is so rapid that it poses a risk of higher inflation, raised their target for overnight interest rates by a quarter-percentage point to 5.5 percent today.

    In addition, the Federal Open Market Committee, the central bank's top policymaking group, adopted a "symmetric" directive that indicates they now are not leaning toward either another rate increase or a rate cut.

    The key to today's action, which is intended to slow spending by both consumers and businesses, was a significant decline last month in the nation's pool of available workers who don't hold jobs. The continuing shrinkage in that pool of workers is a sign that economic growth is still running at an unsustainably high pace, Fed Chairman Alan Greenspan believes.

    This was the Fed's third quarter-point increase in its target for the federal funds rate the interest rates financial institutions charge each other on overnight loans since late June. Since many banks keep their prime lending rate three percentage points above the fed funds rates, today's move means that the interest rates charged on many consumer loans, such as unpaid credit card balances and home equity loans, will go up.

    The impact on 30-year fixed-rate home mortgage loans is uncertain since they are loosely linked to yields on 10-year U.S. Treasury notes, which may or may not change. However, the rates charged on variable-rate mortgages may rise.

    The Fed's action had little immediate impact on financial markets since the possibility of a rate increase had been widely discussed, though many analysts rated the outcome as a toss-up.

    Going into the meeting of the FOMC, members were divided over whether rates needed to be increased. Some who wanted to keep rates unchanged pointed to signs that growth in some parts of the economy, including housing and auto sales, was already slowing. In addition, those officials argued, there is little if any evidence that tight labor markets are causing wages to go up in an inflationary fashion or that inflation is picking up.

    The announcement of the rate increase acknowledged those points but said that wasn't enough.

    "Although cost pressures appear generally contained, risks to sustainable growth persist," the statement said. "Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential.

    "As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue," it said.

    Separately, the Federal Reserve Board, whose members are all also members of the FOMC, raised the Fed's discount rate, the interest rate financial institutions pay when they borrow money from a regional Federal Reserve bank, to 5 percent from 4.75 percent.

    Prior to the meeting, several Fed officials had said that whether any action was taken today, rates would not be changed at the next FOMC meeting on Dec. 21. That is because of concerns about acting close to the end of the year with the possibility of financial market disruptions related to the Y2K computer date change.

    © 1999 The Washington Post Company

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