WASHINGTON, June 30 (UPI) -- The Federal Reserve's decision to raise interest rates Wednesday came as no surprise, but the question now is how much and how often the Fed will continue to jack up interest rates from here on out.
Members of the policy-making Federal Open Market Committee voted unanimously Wednesday to raise the benchmark federal funds target rate by 25 basis points to 1.25 percent, and said that "the evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved."
Indeed, a slew of upbeat economic data were released in recent weeks, from higher industrial output to a marked improvement in the job market and stronger consumer confidence. As such, Fed officials made clear over the past fortnight that there was no longer the need to keep interest rates as low as they were. Wednesday's rate increase was the first since January 2001, when the fed funds target rate was at 6.50 percent.
The rate hike was welcomed by economists and the business community alike.
"The quarter point rate increase was most appropriate. Other than recent shocks from global commodity markets, inflationary pressures remain largely subdued. Labor markets are slack, factory capacity and commercial space are abundant, and productivity growth remains strong," said Peter Morici, an economics professor at Maryland's Robert H. Smith School of Business.
Meanwhile, the U.S. Chamber of Commerce too welcomed the rate hike.
"This measured increase should help assure lenders of the Fed's continued confidence in our economic recovery," said Martin Regalia, the chamber's chief economist. "Because today's rate increase was widely anticipated, it should have a positive impact on financial markets," Regalia added.
Certainly, the financial markets have taken the rate hike in stride. Around 1500 ET Wednesday, the Dow Jones industrial average is up 23.59 points at 10,437.02, while the Nasdaq is up 8.83 at 2,043.76.
But investors are less concerned about the Fed's latest move which was in line with expectations, rather they were anxious about what the Fed might do in coming months. The FOMC is scheduled to meet another four times before the end of this year, and members hinted that more rate cuts were likely in the near future, albeit gradually.
"With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," the FOMC led by its chairman, Alan Greenspan, said.
There is now growing concern among some investors that the Fed could be as aggressive as it had been in jacking up interest rates in coming months as it had been in slashing rates. Indeed, one fear is that history could repeat itself as the Fed raised interest rates from 3.00 percent to 6.00 percent over a 12-month period in 1994, much to the detriment of economic growth.
But in recent years, Greenspan's decision to move decisively has been to the benefit of the overall economy. The central bank's aggressive campaign from January 2001 to slash rates in an effort to stave off an economic slump as a result of the stock market's slump, followed by the Sept. 11 terrorist attacks, certainly worked. By pushing down interest rates to their lowest level since 1958, the U.S. economy flourished as businesses and consumers were able to access money cheaply.
The real estate market in particular has benefited from the low rates, with mortgage rates falling to their all-time low. That in turn has kept housing prices nationwide to continue going up despite the slump in the overall economy over the past few years.
With the latest rate hike, however, the Fed has made clear that the years of historically low interest rates is now over. That raises concerns about higher rates and their effect on the economy, particularly the housing market which many believe has become overheated and ready to burst.
Yet, most economists don't expect the Fed to raise rates at quite the same feverish pace it did to lower rates.
"It will be the economy that determines the speed (of tightening monetary policy," said Joel Naroff, chief economist at Naroff Economic Advisors. "Stronger economic growth and more rapidly rising price pressures will lead to faster and sharper rate hikes. Mr. Greenspan already warned that could happen and don't be surprised if it does," Naroff added.
Meanwhile, the University of Maryland's Morici agreed that the subsequent interest rate rises would be gradual, as he expects the fed funds rate around 2.25 percent at the end of this year and reaching no more than 3.25 percent by the end of 2005.
"There's still slack in the labor market...and excess factory capacity" that would keep the central bank from moving any more assertively, Morici argued. Nevertheless, Morici cautioned that the housing market "could cool down a bit," particularly in the central regions of the United States.
