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Fed lifts benchmark rates
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November 16, 1999: 5:20 p.m. ET
Raises fed funds rate, discount rate a quarter point each to slow growth
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - The Federal Reserve lifted short-term interest rates by a quarter percentage point Tuesday -- the third such move this year -- in an effort to slow the U.S. economy and guard against accelerating inflation.
The Fed raised its federal funds rate -- the target rate at which commercial banks lend to each other overnight -- to 5.50 percent, the third quarter-point increase in less than five months. The less-tinkered-with discount rate -- the rate at which the Fed's 12 district banks lend directly to financial institutions -- was raised a quarter point to 5 percent, in the second increase for the discount rate this year.
The policy-making committee also moved its bias toward future rate actions to "neutral" from "tightening," hinting that another upward move on rates is not necessarily imminent. Few analysts anticipate the Fed will be making any adjustments to policy at its Dec. 21 meeting -- four days before Christmas and 10 before the turn of the century. The next Fed meeting after that is Feb. 2, 2000.
Stocks and bonds churned in the wake of the decision, surging then pulling back, as investors sought perspective on the decision. By late afternoon, it appeared markets concluded the Fed is now finished fiddling with the U.S. economy's performance -- at least for the time being.
Three's a charm
"Given the complete absence of meaningful inflationary pressure evident in the economy now, and -- as the Fed put it, 'tentative evidence of a slowing in certain interest-rate sensitive sectors of the economy' -- we think there is very little chance that rates will rise again in the current cycle," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The Fed's decision came as no surprise to about half of Wall Street, which had expected that tight labor markets and little evidence of slowing economic growth would convince the Fed to raise rates at least one more time -- in effect taking back the third rate cut it gave financial markets at the height of financial crisis that plagued markets a year ago.
The Fed has now taken back all three of the rate cuts it "gave" financial markets more than a year ago
The other half of Wall Street's Fed-watching corps had hoped the central bank would stand pat on rates this time, in the absence of any meaningful inflationary pressure in recent economic reports.
"Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential," the Fed said in a brief statement accompanying its decision.
Avoiding wage pressures
"As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue," it said.
So far, those inflationary pressures are not making themselves known. Two weeks ago the government reported that companies' third-quarter costs for wages, salaries and benefits rose a modest 0.8 percent, while the gross domestic product price deflator -- a measure of inflation - rang in at a low 0.9 percent annual rate.
And last week the government unveiled another report suggesting the same thing -- that worker productivity is ensuring that wages remain competitive, keeping inflation under wraps. Worker productivity surged 4.2 percent in the third quarter after rising a paltry 0.6 percent in the second.
Moreover, recent indicators have suggested the resilient U.S. economy is beginning to slow. New home sales have declined, factory orders have dropped and personal income and spending levels have leveled off -- all a reflection of recent increases in borrowing costs for consumers.
Slowing things down
On the flip side, though, is continued evidence that the U.S. economy -- particularly the U.S. consumer -- is not slowing down. Retail sales remain at near-record levels and the level of imported goods and services remains near an all-time high.
And that is what Fed Chairman Alan Greenspan and the other policy makers want -- to encourage consumers not to spend so much. Within minutes of the Fed's announcement, Bank of America Inc. (BAC) and Wells Fargo & Co. (WFC) announced they will raise the prime interest rate they charge their best customers to 8.5 percent from 8.25 percent, effective Wednesday. Other financial institutions are expected to follow.
"Today's increase in the federal funds rate, together with the policy actions in June and August and the firming of conditions more generally in U.S. financial markets over the course of the year, should markedly diminish the risk of inflation going forward," the Fed said.
"There's some nice symmetry because now we've taken back the 75 basis points Greenspan gave us last year," said Chris Grisanti, Director of Research with Spears, Benzak, Salomon & Farrell. "The Fed has been saying steady as she goes for the last few years if you add it all up, and maybe this is where we will stop."
The New Economy
One of the main reasons anyone on Wall Street even considered the Fed would hold off raising rates was the argument of the New Economy, where technology has come so far so fast that it has made workers more productive and kept costs down.
As little as three years ago, the notion of 4.8 percent growth and 4.1 percent unemployment would not have been tolerated by the Fed. Now the Fed has learned to be more patient, allowing the economy to grow faster than traditional models have suggested without putting on the brakes by raising interest rates.
Even now, most market watchers believe Fed officials will hold off raising rates again for a few months so they can get a better picture of whether the U.S. economy is slowing, by how much and what kind of effect their three rate increases will have on the U.S. economic engine.
Most of them, anyway.
"They're still looking at growth above potential, which is their key phrase," said Henry Willmore, senior economist with Barclays Capital Inc. "They'd like to see a more pronounced slowdown, which is something they will probably begin to see show up in the numbers over the next few months."
At the same time, "It's not entirely out of the picture that the Fed could move again next year if they don't see the slowing they want to."
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