Federal Reserve is expected to raise borrowing costs again today


Published: Tuesday, January 31, 2006 at 6:01 a.m.
Last Modified: Monday, January 30, 2006 at 10:47 p.m.
Alan Greenspan, the nation's economic guardian for 18 1/2 years, and his colleagues are poised to raise borrowing costs yet again at his final Federal Reserve meeting today.
The expected increase - intended to keep the economy and inflation on an even keel - will come as Greenspan, the second-longest serving chairman, ends his era at the central bank.
Greenspan, 79, plans to turn the reins over to his one-time Fed colleague Ben Bernanke, 52, who more recently has been chairman of President Bush's Council of Economic Advisers. The Senate is expected to confirm Bernanke's nomination today. His swearing in as the new Fed chief probably will occur Wednesday.
The changing of the country's economic guard has important implications for millions of investors, large and small.
"This is Greenspan's last hurrah. The swan song for the big guy," said Richard Yamarone, economist at Argus Research.
Federal Reserve policy-makers, at their previous meeting in December, suggested that their nearly two-year credit tightening campaign probably will be winding down. But policy-makers differed as to how much higher rates would need to go to accomplish their mission.
That will be among the challenges Bernanke will confront.
At today's meeting, though, the Fed is expected to add one-quarter of a percentage point to an important short-term interest rate known as the federal funds rate. That would put the funds rate, the interest banks charge each other on overnight loans, at 4.50 percent, and would mark the 14th increase since June 2004.
In response, commercial banks would raise their prime lending rate - for certain credit cards, home equity lines of credit and other loans - by a corresponding amount to 7.50 percent.
Those moves would leave borrowing costs at their highest in more than 4 years.
It is part of a process to bring borrowing cost back to more normal levels. The Fed had sliced its funds rate to a 46-year low of 1 percent as it sought to rescue the economy from the fallout from the bursting of the stock market bubble in 2000, a recession and terror attacks in 2001 and a wave of corporate accounting scandals that rocked Wall Street.
The Fed's rate increases also are aimed at fending off inflation. Consumer prices in 2005 rose by 3.4 percent, the most in five years. The main culprit: lofty energy prices. Economists are still predicting inflation won't be as bad this year, but they admit that the energy situation is a wild card for the economy.
Some economists believe Bernanke at his first meeting as Fed chief on March 28 will push up the funds rate again to 4.75 percent, a move that would show he'll be as tough an inflation-fighter as Greenspan.
"Bernanke needs to do this to send a message to financial markets that when it comes to inflation, 'I'm not Gentle Ben, I'm Big Ben,"' Yamarone joked.
That meeting promises to be closely watched.
The economy grew by just 1.1 percent in the final quarter of 2005, the worst showing in three years, as consumers, businesses and even the federal government tightened the belt.
Despite the feeble finish, the economy logged solid growth of 3.5 percent for all of 2005 - a year when the country coped with fallout from soaring energy prices and the devastating Gulf Coast hurricanes. Economists predict growth for 2006 will top 3 percent.
On the jobs front, economists believe employers boosted payrolls by 245,000 in January, which would mark an improvement from the 108,000 jobs created in December. Unemployment is expected to hold steady at 4.9 percent. The employment report for January will be released Feb. 3.
If the ritual of countless past meetings holds, Greenspan on Tuesday will sink into his chairman's chair - the top of which has a brass plaque that carries his name. (It's a tradition for Fed board members to take their chairs with them when they leave the Fed).
Greenspan and his colleagues will gather around a 27-foot-long mahogany table and discuss interest rate policy.
Analysts are not expecting major changes in the Fed's policy statement, released after the closed-door meeting. "Greenspan wants to go out quietly," said Gregory Miller, chief economist at SunTrust Banks. The Fed chief plans to end his day at the central bank with little fanfare.
After the leaving the Fed, Greenspan plans to open his own economic consulting business. He also may show up on the speaking circuit and write a book.
--- On the Net: Federal Reserve: http://www.federalreserve.gov/

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