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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate

Tuesday, November 01, 2005

Fed Funds Rate Goes Up Another 25 Basis Points; The Published WSJ Prime Rate Set To Do The Same

Today, The Fed decided to continue with their incremental rate raising strategy and raised the Fed Funds Rate (FFR) by 25 basis points (or 0.25 percentage points) to 4.0%. This is the 12th consecutive 25 basis point increase of the FFR, and the Fed probably won't stop raising the FFR until the so called "neutral" rate is reached (intelligent guesstimates have the neutral centered @ 4.5%.), so you can expect another 25 basis point increase when the Federal Open Market Committee (FOMC) meets again in December.

Fuel prices are still relatively high, and hurricane season won't be over until the end of November(!) But the economy is still doing OK, growing by an estimated 3.8% in the 3rd quarter, so today's increase didn't meet any resistance by any of the FOMC members.

Within a day or two, the published Wall Street Journal Prime Rate will go up by 25 basis points to an even 7%. Another 25 basis point increase to the published prime rate is expected after the Fed meets in December.

Here's a snippet from a press release issued by the FOMC today:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent.

Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, 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.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern."

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