No rate hike yet, but Fed warns of action

Kane Loukas

In light of Friday’s inflation report indicating a 0.7 percent jump in consumer prices in April — the largest in nine years — the Federal Reserve on Tuesday afternoon reported that it stood ready to raise interest rates should inflationary pressures build.
This was the first time the Fed concluded a closed-door meeting with an immediate announcement in which policy intentions were so clearly stated. The Fed usually waits about six weeks to make such announcements.
Much of the anticipation stemmed from Friday’s inflation announcement and the economy’s racing growth in the last several years. In the past six months, U.S. growth eclipsed 5 percent, driven by consumer spending and a racing stock market.
On news of the inflation jump, bond prices Friday suffered their worst one-day drop in seven months. Stocks followed close behind, shedding 193.87 points.
The “rates” referred to by the Fed are the interbank lending rate that serves as the benchmark for short-term borrowing costs and the discount rate. They stand at 4.75 percent and 4.5 percent, respectively. If interest rates are raised, stock and bond markets would be hit hard, and consumer spending would eventually slow, quelling inflation.
“I don’t think they are predisposed to raising rates anytime soon,” said David Mihlon, economist for New York-based Trevor Stewart Burton & Jacobsen. “This is just showing that they’re on the job, vigilant, aware and that we’re still here.”
Some economists cite international instability for the Fed’s hesitation to raise interest rates. They were lowered significantly in fall 1998 after Russia’s currency devaluation and continued Asian economic anxieties. A tighter U.S. monetary policy today would touch off a round of global interest rates that could hurt the Asian countries still in recovery.
“It is a signal of a policy intent that is very clear,” said Richard Berner, chief economist at Morgan Stanley in New York. “The Fed really wants to step out in front of any serious build up in inflation. This statement is not a substitute for action, but action will follow.”

Reuters news service
contributed to this report.