Federal Reserve Raises Interest Rates for 13th Consecutive Time, Seeks Further Tightening

Strategic Insights -

The Federal Reserve increased the overnight federal funds rate to 4.25 percent for the 13th time in a row, while indicating that it still wants to push rates a bit higher. However, the central bank's message was ambiguous, leaving room for at least one more rate increase at the end of January. The Fed's policy-making Federal Open Market Committee has been raising rates since June 2004, and its decision to stop referring to its monetary policy as "accommodative" implies that interest rates are closer to a "neutral" level. Despite this, the Fed warned that prices could be pushed higher by rising energy costs and escalating demand for labor and manufacturing capacity.

Key Takeaways:

  • The Federal Reserve raised the overnight federal funds rate to 4.25 percent for the 13th time in a row, with further tightening expected.
  • The central bank's policy-making Federal Open Market Committee stopped referring to its monetary policy as "accommodative," implying that interest rates are closer to a "neutral" level.
  • The Fed warned that prices could be pushed higher by rising energy costs and escalating demand for labor and manufacturing capacity.
  • The Fed's guidance on future rate increases is likely to change, as it has been agreed upon by the policy-making committee that its longstanding guidance would have to be changed before long.
  • The Fed's chairman, Alan Greenspan, has cautioned investors that the Fed might stop giving explicit tips about future policy, making its decisions less predictable.
  • The US economy has shown surprisingly strong growth despite the impact of Hurricane Katrina and rising oil and natural gas prices.

Statistics:

  • The overnight federal funds rate was raised to 4.25 percent, a 0.25 percentage point increase.
  • The Federal Reserve has raised rates 13 times in a row, since June 2004, with a cumulative increase of 3.25 percentage points.
  • Consumer spending remains ambiguous, with the National Retail Federation estimating that retail sales climbed 0.3 percent in November, but declined 0.3 percent excluding car purchases.
  • Existing home sales have slowed, with inventories of houses on the market growing.
  • The US economy is expected to grow at a rapid annual pace of 3.5 percent in early 2006, but slow somewhat in the second half of the year.

Sources:

  • Edmund L. Andrews, WASHINGTON: -- (no date provided)
  • The Federal Reserve's policy statement
  • The National Retail Federation's estimate of retail sales
  • The Federal Reserve's minutes from the policy meeting on Nov. 2