In raising the federal funds rate to 4.25% on Tuesday (Dec. 13), Federal Reserve Chairman Alan Greenspan and his colleagues stopped using the word “accommodation,” which in Fed-speak means that interest rates are kept low enough to boost economic growth.
According to an Associated Press report, dropping “accommodation” from its policy statement suggests the Fed thinks it has raised rates so high that they are no longer stimulating economic activity.
The Fed did keep another key code word – “measured” – which it also has used in all of its 12 previous rate increases, a word that has come to mean that future rate bumps will be small quarter-point moves.
“The committee judges that some further measured policy firming is likely to be needed,” the Fed panel that sets interests rates said in its Tuesday statement.
But many private economists believe there won’t be more than two more quarter-point moves, which would leave the funds rate at 4.75%.
“We are finally seeing the light at the end of the tunnel,” said David Jones, chief economist at DMJ Advisors, a Colorado-based forecasting firm.
After the Fed announcement, banks said they were pushing the prime rate, the benchmark for millions of business and consumer loans, including home equity lines of credit, up to a 4 1/2 -year high of 7.25%.
Many analysts expect the Federal Reserve will boost rates again on Jan. 31, which will be Greenspan’s last meeting, and possibly on March 28, which will be the first time that Ben Bernanke will chair the Fed panel that sets interest rates.
But after that the central bank is expected to be on hold, perhaps for the rest of 2006, which would be good news for borrowers worried that interest rates could be headed significantly higher.