(March 21 – 08:45 ET) – “The Federal Reserve clamped down a bit more on the economy today, raising interest rates a quarter percentage point in an effort to prevent an outbreak of inflation,” writes Richard Stevenson in today’s New York Times.
“The move was no surprise to economists and investors, who had heard repeated hints the last month from Alan Greenspan, the central bank’s chairman, that he intended to stick to his policy of raising rates in small, steady steps until he saw signs that the supercharged economy was throttling back.
“The stock market, which some analysts consider Mr. Greenspan’s main target in raising rates, shrugged off the news and moved higher after the Fed’s announcement this afternoon. Apparently relieved that the central bank did not raise rates a half-point, the Dow Jones industrial average gained 227.10 points, to 10,907.34. The Nasdaq composite index closed at 4,711.68, up 101.68 points.
‘It was the Fed’s fifth quarter-point rate increase since June, and it lifted the benchmark federal funds target rate on overnight loans between banks to 6 percent, its highest level in almost five years. The central bank also raised its discount rate on loans to banks from the Federal Reserve system a quarter of a percentage point, to 5.5 percent.
“The moves put immediate upward pressure on rates paid by consumers and businesses. Banks began raising their prime lending rates a quarter-point, to 9 percent, which will lead to slightly higher rates on many home equity and small-business loans as well as credit cards.
“The Fed’s decision had a less direct effect on mortgage rates and corporate borrowing costs, which are largely set in the bond markets. Those rates have moved up the last year as the Fed has tightened monetary policy and are likely to continue doing so as long as Mr. Greenspan remains on inflation alert. Yields on the 30-year government bond continued to fall, creating an unusual situation in which the Fed’s short-term rates were higher than the market’s longest-term rates.
“In a statement, the Fed’s policy-setting Federal Open Market Committee said it had raised rates again for the same reason it had done so at its last meeting in February. It said, in effect, that growth was running stronger than the economy could sustain over the long run without creating inflationary bottlenecks.