Federal Reserve Raises Interest Rates for Third Time This Year

Strategic Insights -

In a surprise move, the Federal Reserve raised short-term interest rates for the third time this year, increasing the Federal funds rate to 3.75 percent from 3.5 percent. This decision, announced by Fed Chairman Alan Greenspan, aims to curb inflation and keep the economy growing at a moderate pace. Economists predict that the credit tightening will push up other interest rates, making it harder for Americans to borrow money. President Clinton and Laura D'Andrea Tyson, White House's Council of Economic Advisers, expressed confidence in the economy's growth despite the Fed's action.

Key Takeaways:

  • The Federal Reserve raised short-term interest rates for the third time this year, increasing the Federal funds rate to 3.75 percent from 3.5 percent.
  • Economists predict that the credit tightening will push up other interest rates, making it harder for Americans to borrow money.
  • Lynn Reaser, an economist for First Interstate Bancorp, stated that there will be some increase in borrowing costs for both consumers and businesses.
  • Reaser also observed that short-term interest rates remain low and that the Fed's action is unlikely to damage the prospects for continuation of the recovery.
  • The Dow Jones industrial average plunged 41.05 points to 3620.42 after the Fed's announcement.
  • Mickey Levy, the chief economist for NationsBanc Capital Markets, predicted that the central bank will push up interest rates again this year.
  • The Fed wants higher interest rates to keep inflationary demons at bay as the economy keeps growing stronger.
  • Inflation itself has been tame this year, with prices climbing only modestly during March.

Statistics:

  • The Federal funds rate was increased to 3.75 percent from 3.5 percent.
  • The Dow Jones industrial average plunged 41.05 points to 3620.42.
  • The billwether 30-year Treasury bond was down another 1 16/32 to 86, and the issue's yield rose to 7.43 percent.
  • The rate of economic growth is strong, expanding 7 percent during October through December.

Sources:

  • JEFF BATER UPI Business Writer WASHINGTON, April 18
  • First Interstate Bancorp
  • Citibank
  • Fahnestock & Co.
  • NationsBanc Capital Markets
  • U.S. Labor Department report
  • White House's Council of Economic Advisers