The Federal Reserve and Interest Rates
The article "Fed Raises Key Rate Again"(Henderson, 2005), which appeared in The Washington Post, outlines the reasons Federal Reserve officials recently implemented a short-term interest rate increase. The current federal funds rate stands at 4 percent, the highest level since 2001, and reflects a quarter percent increase. Furthermore, this raise is the twelfth consecutive one since June 2004 (Henderson, 2005) and is, as Federal Reserve officers note, only one in a series of anticipated increases. The next raise is likely to take place at the end of January 2006, bringing the federal funds rate to 4.5 percent. However, certain analysts expect increases in December. Some specialists claim a projected rate of 5.5 percent by July of next year, which they say will conclude the cycle of increases. Naturally, with Greenspan retiring at the end of January, the proposed raises are speculative as Bernanke has yet to demonstrate his intentions as the future Federal Reserve Chairman. The new 4 percent federal funds rate brings the cumulative increase over the past 1.3 years to 3 percentage points. The last time this occurred was in the mid-1990s, which created economic havoc both domestically and abroad--particularly in Mexico. How
The increase in the federal funds rate obviously affects consumer and business loan rates. In fact, many banks subsequently raised their prime interest rates on business loans to 7 percent; the same is yet to be seen with consumer interest rates. What's more, interest rates on CDs and money market funds may also experience an increase (Henderson, 2005). With higher borrowing costs and more appealing incentives to save, it is seems rational to state that such changes will discourage inflation. Indeed, this was the main reason Federal Board members decided to raise the federal funds rate: to prevent escalating inflation. In other words, as consumers and businesses spend less money as a result of increased borrowing costs, demand correspondingly decreases, thereby discouraging businesses from raising prices. That Federal Reserve officials plan to continue increasing interests rates was evident with their frank comment about their intentions to do so into the foreseeable future. More specifically, Greenspan mentioned a plan to increase rates at a measured pace (Henderson, 2005), which is expected to be raised one quarter percentage point per Federal Reserve committee meeting. Confidence in the Federal Reserve's statement is evident in the futures markets connected to federal funds rates, which anticipate and ther
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Approximate Word count = 897
Approximate Pages = 4 (250 words per page double spaced)
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