Wednesday, May 19, 1999
Fed warning: Rates could rise
Home loans already up
BY JOHN J. BYCZKOWSKI
The Cincinnati Enquirer
The Federal Reserve said Tuesday it is leaning toward raising interest rates, to keep a strong economy from igniting inflation.
“They've pointed the gun. They just haven't pulled the trigger,” said Stuart Hoffman, chief economist for PNC Bank in Pittsburgh.
After a meeting of the policy-setting Federal Open Market Committee (FOMC), the Fed said it would not change interest rates at this time, but would watch the economy for signals of rising prices.
Investors did pull the trigger, however, as stocks and bonds slumped. The Dow Jones Industrial Average was down as much as 110 points in the minutes following the announcement, but recovered to close down just 16.52 to 10,836.95. Prices of most Treasuries fell, pushing interest rates up.
There were other ripples in the market that might affect consumers more directly. “We're seeing lenders changing their rates already, higher of course,” said Al Humbert, president of Humbert Mortgage Inc. in Wyoming. Rates on 30-year fixed-rate mortgages were rising to 7.25 percent from 7.125 percent Tuesday, and are up about three-eighths of a percentage point in the last 10 days, he said.
Mr. Humbert said the rise in rates won't kill demand for houses, but it is moving pro spective buyers to get off the fence and make decisions. It's also reducing refinancings, which made up two-thirds of Humbert's business last fall when rates bottomed out at 6.5 percent.
The Fed said it was concerned about “the potential for a buildup on inflationary imbalances that could undermine the favorable performance of the economy,” and tilted its monetary policy toward raising rates.
The statement “implicitly suggests the Asian crisis is over,” said John Lonski, chief economist at Moody's Inves tors Service. “You don't want to push U.S. interest rates higher if you're concerned about the world economy.”
An increase in rates, however, is not a foregone conclusion. Last summer, the Fed's bias changed toward tightening, only to lower rates in the fall, and the Asian financial crisis deepened and U.S. securities markets turned down.
The next FOMC meetings are June 29-30 and Aug. 24. Economists said the Fed could act at any time, but action is more likely during those meetings.
The Fed's statement Tuesday made history: It was the first time the Fed ever issued an immediate statement on a change in bias. Usually, the Fed's bias — which way it leans on interest rates — is disclosed only in the FOMC meeting minutes, released on a six-week delay.
In December, the Fed decided it would make infrequent announcements about its bias, “but only when it seemed important for the public to be aware of an important shift in the members' views,” according to FOMC minutes.
Fed warning: Rates could rise
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