FOMC Raises Fed Funds Rate

by Warren Gump (TMFGump)

The Federal Reserve Open Market Committee announced today that they were raising the "Fed Funds" rate .25% to 5%. While this rate itself doesn't directly impact consumers, it is used as the basis for many rates that do affect us. You should expect all banks to raise their so called "prime rate," which is used as the base rate for many credit card and consumer loans, .25% by the end of the week. In the release announcing this change, the Fed stated that it changed from an upward bias to a neutral one, meaning that future rate changes are just as likely to be lower as higher. Although people expected today's rate increase, opinion was mixed as to what bias the Fed would assume for future moves -- many thought they would maintain the stance toward higher rates.

The Fed is taking the action today to prevent the economy from overheating, which in turn could cause inflation. While reported inflation numbers are still tame, the Fed doesn't want an increase to occur. Higher interest rates tend to slow down future economic growth, but it usually takes six to nine months for a rate change to start impacting the economy.

Today's rate increase should be put in context with the three .25% decreases announced last fall. These declines were implemented to alleviate a liquidity crisis caused by disruption in non-U.S. economies, not due to weakness in the U.S. economy. Rates are still .5% lower than they were before the first of those moves. Investors interested in future moves will have to continue monitoring economic events as they unfold. Below is the Fed's press release announcing today's moves.

The following statement was released this afternoon by the Federal Reserve:

Press Release
June 30, 1999

The Federal Open Market Committee today voted to raise its target for the federal funds rate 25 basis points to 5 percent. Last fall the Committee reduced interest rates to counter a significant seizing-up of financial markets in the United States. Since then much of the financial strain has eased, foreign economies have firmed, and economic activity in the United States has moved forward at a brisk pace. Accordingly, the full degree of adjustment is judged no longer necessary.

Labor markets have continued to tighten over recent quarters, but strengthening productivity growth has contained inflationary pressures.

Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action. The Committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth.