Houston's Rate Sheet

Fed raises rate and there's no end in site

Well we've got a new Fed Chief, but like it or not, we've got the same Fed. In his first meeting as Fed Chairman, Ben Bernanke and the Federal Open Markets Committee (FOMC) raised the Federal Funds rate a 1/4 point. It was the fifteenth consecutive increase since June 2004. This move will immediately raise the monthly payments on Home Equity Lines of Credit as well as credit card debt. And it appears that they are not stopping with this one. As I posted yesterday, the key thing to watch for would be the verbiage used by the Fed to justify the increase. The Fed chose the exact same language when they raised rates last month.

"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

After the announcement, Treasury yields were on their way up. According to Reuters, the yield on the benchmark 10-year Treasury was at 4.77 percent at 2:25 p.m. versus 4.71 percent late on Monday. We can expect mortgage rates to move in the same direction.

Here's some further analysis from Joel Naroff, Chief Economist at Commerce Bank:

The more things change, the more they remain the same. At least for now. This was the first FOMC meeting for Fed Chairman Bernanke and just like the last fourteen that Mr. Greenspan ran, it ended with a 25 basis point increase in the funds rate. So, we now have fifteen consecutive meeting, spanning twenty months, where short-term rates were hiked by ¼ percentage point.

While the increase in the funds rate was a given, the questions we had before the meeting had to do with the wording of the statement. Would it be changed significantly? Would hints be given about when the Fed might stop raising rates? The answers are a little and no.

Let’s start with the description of the economy. It was a little more descriptive and seemed to provide some additional information about the Committees thinking. In particular, it indicated that neither the cold fourth quarter nor the hot first quarter accurately measured the likely future path of economic growth. Instead, the Committee noted that the economy “appears likely to moderate to a more sustainable pace.”

What about future rate hikes? The Committee repeated that it “judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.” In other words, the likelihood of another rate hike remains the same today as it did the day of the last meeting. That is, it is likely.

Inflation remains the worry. While the statement largely echoed the concerns about tightening labor markets and rising energy costs previously stated, commodity price pressures were added to the list. This seems to heighten the concern that inflation could accelerate. And one thing the Fed will not tolerate is rising inflation.

Basically, the new boss has the same worries as the old boss. And maybe more so. For the markets, this cannot be good news. Investors were hoping there would be some indication that the tightening cycle would be coming to an end. Their hopes were dashed.

posted by Vincent Biondillo @ 3:04 PM