Fed raises U.S. rates, one voter dissents
"U.S. Economy"09/20/2005
Tuesday September 20, 2005
WASHINGTON (Reuters) - The Federal Reserve raised U.S. interest rates on Tuesday for an 11th straight time, signaling more increases to come and saying Hurricane Katrina will provide only a temporary setback to the broad economy.
But Fed Board Governor Mark Olson dissented from the rate-rise vote, saying he preferred to hold borrowing costs steady. This was the first such dissent since June 2003.
By a nine-to-one vote, the policy-setting Federal Open Market Committee opted to increase the benchmark federal funds rate charged on overnight loans between banks a quarter of a percentage point to 3.75 percent.
In a statement outlining its decision, the Fed said U.S. spending, production and employment will suffer a near-term knock from Katrina and that energy prices may be elevated and volatile.
“While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee’s view that they do not pose a more persistent threat,” the FOMC said in a statement.
Analysts said that while policy-makers clearly served notice they were not yet done raising rates, there were reasons to think they might be getting close to it.
“This summer’s energy shock will cascade through the economy. A brutal winter heating season can’t be ruled out. Detroit is losing steam,” said Sung Won Sohn, chief executive officer of Hanmi Bank in San Francisco.
He predicted one more rate rise, to 4 percent, at the next scheduled FOMC meeting on November 1, and then a “wait and see” pause.
Similarly, economist Julian Jessop of London-based Capital Economics anticipated that “rates will rise by one last quarter percentage point in November, before a return to below-trend growth keeps them on hold at 4 percent throughout 2006.”
A Reuters poll of economists at 21 primary dealers, the biggest Wall Street firms that deal directly with the Fed, found 19 of them anticipating another quarter percentage point rate hike in November.
Investors braced for higher borrowing costs.
The Dow Jones industrial average dropped 76.11 points to end at 10,481.52 while the high-tech Nasdaq composite index lost 13.93 points and ended at 2,131.33.
Prices for short-term U.S. Treasury debt declined. The two-year note dropped 4/32s to yield 3.99 percent. The five-year note also was off 4/32s and yielded 4.06 percent. But the 30-year U.S. Treasury bond added 13/32s and was yielding 4.53 percent.
The fed funds rate now stands at its highest level since June 2001, though market-set long-term rates remain low by historical standards.
“Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained,” the Fed said.
By the time the policy-makers met, earlier speculation that the damage wrought by Katrina might prompt a hiatus in the rate-rise campaign had died down and an increase was widely expected.
The hurricane that struck August 29 killed more than 900 people in five states and disrupted oil production and distribution. The estimated cost of rebuilding has run as high as $200 billion or more.
Some data have shown that consumer confidence and spending suffered in the immediate wake of the storm. The University of Michigan’s consumer sentiment index fell to a 13-year low in September and other surveys have shown U.S. chain-store sales under pressure.
Costlier energy is one factor making the Fed wary.
Oil prices, already high before Katrina, jumped to a record $70.85 a barrel right after the storm. On Tuesday they slipped to around $66, although a new storm approaching the Florida Keys was worrying traders.
The U.S. economy is still growing despite higher oil prices, but the Fed is keeping a close watch to see how costlier energy is affecting broader prices.
In the statement outlining its action, the Fed said with appropriate monetary policy, upside and downside risks to its twin goals of sustainable growth and price stability should remain “roughly equal.”
In concert with its action on the key overnight rate, the Fed lifted the largely symbolic discount rate a matching quarter-point to 4.75 percent.