WASHINGTON-Federal Reserve officials on March 21, acting on concerns that the nation's ballooning economy and a tight labor market might lead to inflation, raised short-term interest rates as widely predicted, by a quarter-percentage point and indicated that more such moves are likely if growth doesn't slow to more acceptable levels. The action by the Federal Open Market Committee, the central bank's top policymaking group, was the fifth such increase since last June. The federal funds rate, the interest rate financial institutions charge each other on overnight loans, went to 6%. The Federal Reserve Board separately increased the discount rate- what financial institutions pay when they borrow directly from a Federal Reserve Bank- to 5.5% from 5.25%. Almost immediately, banks began to pass along the increases by ratcheting up their prime interest rate to 9%. Consumers will consequently see an increase on the interest rate they pay for home equity loans and credit card balances, which are generally tied to the prime and hover, usually 3% above it. Making the cost of funds go up is meant to discourage borrowing, and thus reduce spending, but whether that will happen or not is an outcome many economists and analysts cannot predict. Americans are on a spending spree, as figures announced by the Commerce Department bear out. So while the robust American economy continues its expansion, prodded, say analysts, by rising oil prices and demand for imported goods, the trade deficit soared to $28 billion in January. Not all market and monetary policy experts are approving of the Fed's incremental approach to boosting rates-at least absent an obvious inflationary threat. "Alan Greenspan is playing the most dangerous game of his life," said investment analyst and frequent credit union conference speaker Frank Cappiello, to an audience recently in Palm Beach, Florida. Speaking to an audience at The Society of the Four Arts, he was quoted in The Palm Beach Daily News as stating that "He is in a situation that, if he goes too far, it will be irretrievable." Where that irretrievable point lies however, even Cappiello cannot say, adding that the Fed is not the sole determinant of what the soaring stock market will do. But he offered one sure thing as a reminder to those who may temporarily forget Newton's law: what goes up must come down. The high-flying tech stock indexes were balanced of late by a resurgent Dow Jones average, bringing some old-world common sense (and investor dollars) back into BlueChips, say analysts. But it all could end very quickly, Cappiello said. "The question we all have is when will it end and how will it end, for end it will. We all know that." -
caburger@cutimes.com
