Fed Eases Investor Concerns
Investors are breathing a sigh of relief Thursday, after the Federal Reserve indicated WednesdayÂ's modest interest-rate hike may be all thatÂ's needed for awhile, reports CBS Marketwatch Correspondent Betsy Karetnick.
Federal Reserve policymakers raised short-term interest rates by a quarter percentage point in a bid to keep inflation low, the first rate hike by the central bank's policy arm in more than two years.
The Federal Open Market Committee (FOMC) said it was raising its target on the Federal funds rate, which is the rate banks charge each other on overnight loans, from 4.75 percent to 5 percent.
The FOMC said it was taking the action as a "pre-emptive" move to ease the economy onto a slower track before tight labor markets spark a new round of inflation.
Fed Chairman Alan Greenspan signaled the policy change in testimony to the Joint Economic Committee two weeks ago, saying, "When we can be pre-emptive, we should be, because modest pre-emptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy."
After Greenspan spoke, the only question for investors was: What will the Fed do next?
The answer won't be known definitively for months, but everything the FOMC and the Fed governors do until then will be examined closely for clues.
And the Fed will be looking at the economy for signs of slowing or signs of inflation. So far, evidence for either is skimpy.
If this is the start of a series of rate hikes, thatÂ's when consumers should reassess some loans. A series could cut economic growth off and eventually affect the stock marketÂ's performance and portfolio performance.
The widely anticipated move by the Fed's policy-making committee was the first tightening of monetary policy since March 25, 1997.
The 10-member FOMC warned after its last meeting that it was leaning toward raising rates because it feared that the economy is growing too fast to maintain inflation at a low level. The economy has been growing at about a 4 percent pace for the past three years while inflation, by most measures, has dropped to 2 percent or lower.
Interest rates had been rising in advance of an anticipated Federal Reserve rate hike. Mortgages went up since the end of April—about a full percentage point.
Consumer rates might be affected when the prime rate goes up, some home equity loans may go up and car loans may go up.
Changes in the Fed funds rate are typically matched by banks' prime rates, short-term interest rates on Treasury bills and other market-determined rates, such as mortgages. Eventually, those higher rates brake the economy by making borrowing more expensive.