What Fed’s latest mumbo jumbo means

first_imgThe Federal Reserve’s boost in short-term interest rates last week has clear implications for investors who are saving or borrowing money. But when it comes to gauging what’s ahead for interest rates in 2006, individual investors can join professionals in scratching their heads about the statement released by the Fed Tuesday when it raised its short-term interest-rate target to 4.25% from 4%. The Fed, which often seems to say confusing things about the economy and its rate-setting intentions, has done it again. The Fed’s policy-setting committee made an announcement that appeared to signal that rates could still rise a little or a lot depending on events. The latest quarter-point rise is the 13th increase of that size since mid-2004, when the Fed’s target was just 1%. The latest move will help raise some consumer borrowing costs, including rates on adjustable- rate mortgages and home-equity lines of credit. However, people now shopping for fixed-rate mortgages whose rates are based on long-term bond yields rather than short-term interest rates might fare better, says Wayne Bopp, an analyst at Cincinnati- based Fifth Third Asset Management. Such bond yields fell in recent days on optimism that the Fed has inflation under control. Boon for Savers Savers, meanwhile, will see higher rates of return almost immediately on some short-term investments. Rates on money-market mutual funds could jump by about as much as the Fed lifted its key rate. In looking at the Fed’s latest statement, some professional investors were particularly cheered by one change in wording compared to previous announcements. This time, the Fed didn’t suggest that its policy remained “accommodative.” That means the Fed no longer sees itself as pushing down on the economy’s accelerator by keeping loan rates unusually low for businesses and consumers. With slower growth will come less risk of inflation. But the Fed cautioned that “some further measured policy firming is likely to be needed.” That’s Fedspeak for more rate increases of a quarter of a percentage point. And in a classically turgid turn of phrase, the Fed said, “Possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.” Translation: Policy makers are still watching for signs that higher labor and energy costs are permanently boosting inflation. With higher inflation, Fed officials might be inclined to continue raising short-term rates next year, perhaps to 5% or higher. The Fed’s long-term mission is to spur steady economic growth without inflation. A primary tool is its ability to push short-term interest rates up and down. Policy makers have good reason to be equivocal in what they say: They want the option of shifting policy if economic circumstances abruptly change. There’s a particular reason to want flexibility at the moment: After 18 years in the job, Alan Greenspan is about to hand the Fed chairmanship over to Ben S. Bernanke. Many Fed watchers believe Mr. Greenspan wants to depart without leaving policy makers locked into a course of action. What’s Next? Market watchers offer varied predictions. “One or two more rate moves look likely” before the Fed wraps up this series of rate increases, says Keith Hembre, chief economist at Minneapolis-based U.S. Bancorp Asset Management. Robert Gahagan of American Century Investment Management Inc. in Mountain View, Calif., isn’t sure that will be the end. Fed policy will be as dependent as ever on the trends in growth, labor costs and broad inflation, he says. “We are going into 2006 with more uncertainty than we did entering 2005,” he adds. Mortgage borrowers shouldn’t wait around in the hope that their rates will fall, cautions Michael Kastner, head of fixed income at New York investment adviser SterlingStamos Capital Management. The rates on 30-year fixed mortgages, currently in the high-5% area, still are attractively low by historic standards, he says. He says mortgage rates could rise if the Federal government borrows more money to cover its large budget deficit, putting upward pressure on bond yields. AD Quality Auto 360p 720p 1080p Top articles1/5READ MORERose Parade grand marshal Rita Moreno talks New Year’s Day outfit and ‘West Side Story’ remake160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set!last_img

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