January 31, 2005 11:35 AM
Federal Reserve Is Expected to Continue Raising Rates
Excerpt: Notwithstanding new evidence released on Friday that economic growth has slowed in recent months, the Federal Reserve appears poised to continue raising interest rates for most if not all of this year.
Notwithstanding new evidence released on Friday that economic growth has slowed in recent months, the Federal Reserve appears poised to continue raising interest rates for most if not all of this year.
Analysts almost unanimously predict that the Fed will increase rates on Wednesday by another quarter-point, to 2.5 percent, and most expect the central bank to repeat past statements about raising rates at a "measured" pace.
A variety of economic trends suggests that policy makers have no reason to slow or accelerate the rate increases anytime soon.
Inflation, though still subdued by most measures, is running higher than a year ago. Strong oil prices and a weaker dollar both push up the cost of imports, and many analysts have predicted that the soaring trade deficit will cause the dollar to fall even further over the next year.
But in a series of recent speeches and public comments, Fed officials have placed more emphasis on their view that growth will probably remain fairly strong this year and the economy does not need to be stimulated.
On Friday, the Commerce Department estimated that the economy grew at an annual rate of 3.1 percent from September through December, much slower than in the previous quarter and less than most forecasters had predicted.
Still, other indicators point to steady if not spectacular growth of about 3.5 percent this year, which would be the fourth consecutive year of an expansion.
One significant reason for the Fed to keep lifting short-term rates, analysts said, is that cheap money is almost as plentiful now as it was before the Fed started the process six months ago.
Although short-term interest rates have been nudged up five times since last June, to 2.25 percent from 1 percent, the cost of home mortgages and long-term corporate financing has actually declined.
Rates on 10-year Treasury bonds, which directly affect home mortgage rates, were near 4.13 percent on Friday. That was lower than they were last June, before the central bank first raised the federal funds rate on overnight loans between banks.
The persistence of low long-term rates has kept the nation's housing market hotter than most forecasters had expected, and it has also made it easy for companies to raise money at low cost for either expansion or acquisitions.
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