Transcript of the Fed’s Statement
Here is the statement issued by the Federal Reserve’s policymaking committee regarding its interest rate decision Tuesday:
The Federal Open Market Committee today voted to raise its target for the federal funds rate by 25 basis points [0.25-point] to 5.5%. In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5%.
Although cost pressures appear generally contained, risks to sustainable growth persist. Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy’s growth potential.
As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue.
Today’s increase in the federal funds rate, together with the policy actions in June and August and the firming of conditions more generally in U.S. financial markets over the course of the year, should markedly diminish the risk of inflation going forward.
As a consequence, the directive the Federal Open Market Committee adopted is symmetrical with regard to the outlook for policy over the near term.
In taking the discount rate action, the Federal Reserve Board approved requests submitted by the boards of directors of the Federal Reserve banks of Boston, Cleveland, Richmond and Kansas City.
The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their district Federal Reserve banks.
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Fed Fallout: Effect on Other Rates
Here’s a look at how the Federal Reserve’s quarter-point increase in its benchmark short-term interest rate, the federal funds rate, may affect other interest rates. Noted are changes in key rates since the Fed’s previous quarter-point increase, on Aug. 24, and the outlook:
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Change since Current prev Fed Item rate hike-8/24 Federal funds rate 5.5% +0.25 pts. Prime rate 8.5% +0.25 pts. Money market 4.94% +0.31 pts. mutual fund average yield 6-mo Treasury 5.45% +0.36 pts. bill yield 1-year CD yield 5.19% +0.21 pts. (national avg.) 30-yr mortgage 7.67% -0.26 pts. rate (Freddie Mac) 30-yr Treasury 6.06% +0.13 pts. bond yield
Item Outlook Federal funds rate Fed says it’s neutral now, but they said that last time too. Prime rate Banks immediately raised the prime Tuesday, 8.5% should hold for now; is your home equity loan tied to prime? Money market Fed increase should mutual fund put more upward pressure on average yield on money market yields. 6-mo Treasury T-bill yields are bill yield highest since late 1997; could rise further unless Y2K fears attract buyers. 1-year CD yield True to form banks have (national avg.) raised CD yields slowly, trend is still up. 30-yr mortgage Eased investor jitters have rate (Freddie Mac) helped bring mortgage rates down since last Fed hike, bonds may determine next move. 30-yr Treasury Yield up from last Fed bond yield hike, Fed’s anti-inflation stance could keep lid on bonds now.
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Sources: IBC Financial Data (money market fund yields and CD yields), Times research
