Fed Raises Key Rate Again(henderson, 2005), Which Term Paper

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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%, 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%. However, certain analysts expect increases in December. Some specialists claim a projected rate of 5.5% 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% 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. However, such turmoil is not currently present in the economy. This is due to an important difference between current increases and those during the 1990s: the former were anticipated while the latter were mostly unexpected.

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The implication is that predictable interest rate raises are readily absorbed into the economy whereas unforeseen increases tend to distress it. Current conditions support this principle. Despite rising energy costs and interest rates, the economy continues to expand. Furthermore, the Commerce Department recently stated that the nation's GDP 'rose at a 3.8% annual rate in the third quarter after expanding at a 3.3% pace in the previous quarter' (Henderson, 2005, p.1). Certainly a nation's economic welfare benefits from anticipated and gradual interest rate increases.

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 therefore have planned for a 4.5% (as mentioned above). Along with the current increase, subsequent raises are deemed low enough to check inflation while simultaneously capable of stimulating economic growth.

The increase in the federal funds rate obviously affects consumer and business loan rates. In fact, many banks subsequently raised their prime.....

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