Fed Raises Rates, But Mortgage Rates Stay Low
The Federal Reserve again has boosted the cost of borrowing for millions of consumers by raising short-term interest rates. Tuesday's quarter-point hike -- the eighth since June 2004 -- bumps a key bank lending rate to 3 percent.
In its announcement, the Fed said spending growth has slowed somewhat, partly in response to higher energy prices, but it noted that inflation pressures have picked up in recent months.
Despite higher short-term rates, longer-term mortgage rates have remained low by historical standards.
"It's very unusual for long-term interest rates to have done what they have done," Mark Vitner, senior economist at Wachovia Corp., tells Melissa Block. Vitner says mortgage rates, and the bond market, are responding to the Fed's success in bringing inflation down and keeping it under control.
"In the past, when the Federal Reserve began to tighten monetary policy, it was usually because inflation was showing signs of accelerating, and accelerating to some unknown level," Vitner says. "This time, the Fed has been very clear that even though we are seeing some signs of inflation out there, that they believe that inflation will be well-contained."
Investors "really do believe that inflation, while it's likely to creep up a little bit, is not going to become a major problem," he says.
The Fed's Statement
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident.
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.
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