OT???? Interest rates hike. Andy, Mr Decker, economists out there...feedback please

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I got this today from CNN news.

Fed boosts key rate again Committee raises fed funds, discount rate by quarter point to cool growth By Staff Writer M. Corey Goldman August 24, 1999: 4:59 p.m. ET

NEW YORK (CNNfn) - The Federal Reserve raised short-term interest rates by a quarter point Tuesday - a move meant to slow the resilient U.S. economy and keep inflation away - and dropped a subtle hint that another rate rise may not happen so quickly. As expected, the Fed hiked the fed funds rate -- the target rate commercial banks lend to each other overnight -- to 5.25 percent, the second quarter-point increase in two months. The less-tinkered-with discount rate -- the rate at which the Fed's 12 district banks lend directly to financial institutions -- was increased to 4.75 percent from 4.5 percent. It was the first time since April 1994 that the Fed opted to raise the fed funds rate at two consecutive Open Market Committee meetings and the first time since February 1995 that it moved the discount rate -- a sign that it wants to keep inflation in check. At the same time, the policy-making committee announced its decision to keep its bias neutral toward future rate actions, hinting that another rate move isn't necessarily imminent. "It's a signal to the market that the Fed means business here," said Paul Hancock, a portfolio manager with Investors Group Inc. in Winnipeg, Manitoba. "It suggests the Fed is being tough on keeping inflation away but it also suggests they're willing to wait to see how things go before the move a third time." Hardline approach

Stocks and bonds, which immediately shot out the gate following the announcement, gave back much of their gains as investors concluded that a third rate rise before year's end is still a possibility. The benchmark 30-year Treasury rose more than 1/2 a point, pushing its yield to 5.95 percent. The Dow Jones industrial average rose more than 45 points to 11,348 before sliding back into negative territory, ending the day down just 16 points. The rate rise comes in the wake of economic reports showing persistently strong U.S. growth, but little actual inflation - the nemesis of the stock and bond markets. It also follows on the heels of a series of rate reductions that some economists believe the Fed is now taking back. "From my perspective it leaves the door open to further rate hikes," said Dick Berner, senior economist with Morgan Stanley Dean Witter in New York. "Remember: the Fed is taking back what they gave last year, which suggests they will raise rates one more time and then see what to do after that."

-- The Outcast (Somewhere@southerneurope.eu), August 25, 1999

Answers

From the New Jersey online News:

Y2K bug could play big part in rate hikes

Ray

-- Ray (ray@totacc.com), August 25, 1999.


Here's a Reuters on article that discusses y2k and the rate hike:

Fed hikes interest rates; markets close mixed

Snip:

" "I think as we go into the fall, [there'll be] concern about inventory building for Y2K that may be even causing more economic strength, and I would think that it might be better to get the tightening behind us as opposed to waiting further in the fall," said Phillips, who left the Fed board in June 1998 for an academic post in Washington."

Ray

-- Ray (ray@totacc.com), August 25, 1999.


Commodity prices such as crude oil and other energies, grains, and wages have increased steadily in this heating economy.

Raising interest rates are supposed to counter these price pressures but Greenspan has been behind the curve in his policy moves since market interest rates (mortgages, bonds) have already increased 50 to 100 basis points while his move was only 25 basis points.

IMHO, he probably just wanted to flatten the yield curve more than anything else as the market has done the tightening for him already.

-- miyamotokun (econ@knowledge.net), August 25, 1999.


Lets all watch and see what the interest rates and the stock market does when NYMEX crude oil hits a hoarding and market uncertainty induced +$30 in the 4th quarter.

-- Downstreamer (downstream@bigfoot.com), August 25, 1999.

As long as people have jobs, they don't care about the rate hikes. They will continue to spend and consume. We have it good right now, a chicken in every pot, credit cards up the ying yang, spend it today and don't worry about tomorrow. Savings are at an all time low and when the bubble bursts in late September and early October, people are going to be PISSED! There will be one more rate hike this year to get everyone's attention and it will be down hill from there. The masses will start scrambling for goods and what little cash they have in the bank will be removed. This is what will cause the biggest problems for the masses, low inventories on Y2K supplies (food, generators, etc.). It's going to be fun to watch the herd scrambling for information. I predict that this site will be filled with threads from newbies wanting information and they will be frantic threads. How will we handle them since most of us have been there and done that?

-- A No Brainer (anobrainer@anobrainerr.com), August 25, 1999.


I will handle it by turning off my computer and enjoying a nice glass of wine from my stockpile. Let Y2K Pro and Hoff handle the stragglers.

-- a (a@a.a), August 25, 1999.

I think the point of the rate rise is not to quell inflation. It is my guess that AG is much more concerned with the value of the US dollar.

The dollar is trading at around 117 Yen, while a year ago it was at 147 Yen. This makes our exports easier to sell, but we import more than we export, and the dollar drop makes imports more costly.

Foreign investors invest heavily in our stock and bond markets. A falling dollar changes the investment equation. Why would anyone invest in a widget whose value is deflating?

To appreciate the impact of a falling dollar we have to go back to 1987. Treasury Secretary Jim Baker gave a speech abroad on October 18, 1987 stating we would not try to defend a falling dollar. The next morning, foreign investors lined up to sell US stocks. When the dust cleared on October 19, 1987, the market was off more than 20%, which was the largest one-day drop in history.

The classc way to increase the value of a currency is to raise interest rates and provide foreign investors another reason to commit to your currency. I think the Fed is worried about a run on our dollar and has little choice but to increase interest rates.

-- mike (maples@voy.net), August 25, 1999.


mike,

>> I think the point of the rate rise is not to quell inflation. It is my guess that AG is much more concerned with the value of the US dollar. [...and further cogent observations...] <<

I was thinking the same. This rate hike has nothing to do with price or wage inflation. It is to shore up the sagging dollar. Once again, financial markets will be the tail that wags the real economy. Watching the global markets for the past two years has been like watching a train wreck in slow motion.

-- Brian McLaughlin (brianm@ims.com), August 25, 1999.


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