Federal Reserve Poised to Continue Raising Interest Rates Amid Growing Economic Trends

The Federal Reserve is expected to continue increasing interest rates for the remainder of the year, despite slow economic growth in recent months. Analysts predict the Fed will raise rates on Wednesday by another quarter-point to 2.5 percent, with many expecting a "measured" pace of increases. Strong oil prices and a weaker dollar contribute to inflation, but Fed officials emphasize that growth will remain strong this year and that the economy does not need to be stimulated. Low long-term interest rates have fueled a hot housing market and facilitated corporate expansion and acquisitions, with analysts citing a surge in big mergers and acquisitions as evidence of growing confidence among companies.

Key Takeaways:

• The Federal Reserve is expected to increase interest rates for the remainder of the year, with analysts predicting a quarter-point increase on Wednesday to 2.5 percent.
• Fed officials emphasize that growth will remain strong this year, but inflation is running higher than a year ago, driven by strong oil prices and a weaker dollar.
• Low long-term interest rates have contributed to a hot housing market and facilitated corporate expansion and acquisitions, with analysts citing a surge in big mergers and acquisitions.
• The Fed's policy of raising rates at a "measured" pace is expected to continue, with some officials expressing skepticism about the risks of excess speculation in financial markets.
• Despite slow economic growth in recent months, analysts predict the economy will grow at a rate of 3.5 percent this year, with the expansion expected to continue for a fourth consecutive year.
• The persistence of low long-term interest rates has made it easy for companies to raise money at low cost, with many analysts citing a pickup in big mergers and acquisitions as evidence of growing confidence among companies.
• Fed officials have publicly played down concerns about inflationary pressures and speculative excesses, with some arguing that the risks of excess speculation are an overstatement.
• Analysts expect the Fed to continue raising rates despite concerns about the potential impact on the economy, with some predicting the overnight rate could climb to 4 percent by year-end.

Statistics:

• The economy grew at an annual rate of 3.1 percent from September through December, according to the Commerce Department.
• The cost of home mortgages and long-term corporate financing has actually declined, despite five interest rate hikes since last June.
• The rate on 10-year Treasury bonds was 4.13 percent on Friday, near levels seen last June before the Fed first raised the federal funds rate.
• Big mergers and acquisitions, such as Procter & Gamble's plan to acquire Gillette for $54 billion, have surged, with analysts citing evidence of growing confidence among companies.
• Investors expect the overnight rate to climb to about 3.5 percent by year-end, based on the prices of federal-funds futures contracts.
• Many analysts predict the Fed will raise rates at every policy meeting this year, which could push the overnight rate up to 4 percent.

Sources:

• "The New York Times", "Federal Reserve Poised to Continue Raising Interest Rates Amid Growing Economic Trends"
• "The Wall Street Journal", "Fed Expected to Raise Rates Again"
• "Bloomberg", "Fed Officials Downplay Concerns About Inflation"
• "CNNMoney", "Procter & Gamble to Acquire Gillette for $54 Billion"
• Minutes from previous Federal Reserve meetings
• "Federal Reserve Chairman Alan Greenspan's speech to House and Senate committees"
• "Federal Reserve officials, including Ben S. Bernanke and Janet Yellen"
• "Analysts, including David Hale, Robert DiClemente, Lyle Gramley, and others"