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Fed hikes U.S. rates
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March 25, 1997: 8:24 p.m. ET
Central bank ups federal funds rate 25 basis points to 5.50 percent
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NEW YORK (CNNfn) - The Federal Reserve made borrowing money more expensive Tuesday, boosting short-term U.S. interest rates for the first time in more than two years in a pre-emptive strike against inflation.
Following a day-long Washington meeting of the policymaking Federal Open Market Committee, the central bank raised the key federal funds rate 0.25 percentage points to 5.50 percent.
The funds rate is the rate that banks charge each other for overnight loans.
Many financial institutions use the rate as a basis for setting interest charges on a variety of products, from mortgage and car loans to credit cards.
Soon after the Fed's announcement, BancOne raised its prime lending rate -- the rate the institution charges its best customers. Observers expected other banks to quickly follow suit.
The Fed said Tuesday's rate change, the first boost since February 1995, would help prolong U.S. economic growth while limiting inflation.
"This action was taken in light of persisting strength in demand, which is progressively increasing the risk of inflationary imbalances developing in the economy that would eventually undermine the long expansion," the Fed said in a statement.
Still, the Fed left another key rate, the discount rate, unchanged at 5.0 percent.
Higher short-term rates have far-reaching implications for the economy.
Higher rates usually make fixed-income investments such as bonds more attractive, weakening demand for stocks.
Former Federal Reserve governor Lyle Gramley said there might be other increases in short-term rates in 1997, but nothing like the hikes made three years ago. (194K WAV) or (194K AIFF)
Stocks had mostly fallen in recent days as investors anticipated the Fed's move.
But Tuesday, the Dow Jones industrial average shot up more than 30 points in the moments after the Fed announcement, gaining on what analysts called a "relief rally."
However, the Dow later fell back in erratic trading.
Markets had largely expected Tuesday's move.
Fed Chairman Alan Greenspan - armed with evidence of rising hourly wages, a sharp increase in consumer debt and other signs of potential inflation - had warned for months of a potential rate hike.
The Fed raises rates when it thinks an overheating U.S. economy will spawn inflation, cutting rates when the bank believes the nation faces weak economic conditions.
Although Greenspan's comments about potential inflation roiled markets at times in recent months, many analysts eventually agreed that a boost in rates could preserve growth.
"The markets are saying (a rate hike) is not only justified, but it's good news," said Wayne Angell, a former Fed governor who now serves as chief economist at Bear Stearns. "It remains to be seen whether the economy will be stronger than we anticipate."
But Lou Ehrenkrantz, market strategist at Ehrenkrantz King Nussbaum, called Tuesday's news "a non-event," noting that Greenspan twice warned in recent months that higher rates seemed possible.
Still, Ehrenkrantz, said that regardless a rate hike's merits, the fundamentals of Wall Street's longrunning bull market have changed enough in recent weeks to raise doubts about stocks' outlook.
"I think the market has run into trouble in recent weeks, because the nature of the market is shifting rapidly, which is why it has appeared so volatile," Ehrenkrantz said.
-- David Rynecki
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Federal Reserve
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