Fed Raises Rates, Believes Economy Will Accelerate
BY Matt Quinn
August 11, 2004 -- The Federal Reserve raised its short-term interest rate target by a quarter-point for the second time this year on Tuesday. The move was widely expected despite recent data showing slower output growth and poor job creation. The Fed blamed high energy prices for the slowdown and said it expects stronger growth in the future.
Fed policymakers voted unanimously to increase the short-term interest rate to 1.5 percent. The Fed raised the rate for the first time in four years in June.
In a statement announcing the rate hike, the Fed said, "In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices."
But the statement also offered some reassuring words to the stock markets, saying, "The economy nevertheless appears poised to resume a stronger pace of expansion going forward."
Though Fed policymakers have raised interests in their last two meeting, small businesses shouldn't feel much of a squeeze, according to Bruce Phillips, a senior economist with the National Federation of Independent Business.
"Firms that were going to borrow money are not going to be dissuaded by a quarter-point hike," he said, pointing out that NFIB research shows that most small businesses rely on existing lines of credit or credit cards, both of which would see almost no change.
Though access to capital should remain relatively easy, high energy and gasoline prices are still major hindrances to economic growth. Crude oil prices hit record-highs this week, nearing $45 per barrel.
While gas prices soared, gross domestic product grew at a pedestrian 3 percent in the second quarter after expanding at a blazing 4.5 percent in the first.
The labor markets have also cooled off considerably. Only 32,000 payroll jobs were added in July when economists had forecasted that more than 200,000 new jobs were created.
The big question now is what the Fed will do during the remainder of the year. Economists had previously anticipated that the Fed would raise rates three more times this year in quarter-point incrementals. Many now believe the Fed may be forced to raise rates at a slower rate.
MATT QUINN contributes to the Wall Street Journal's corporate finance blog. He has also written extensively about banking and corporate finance for publications including Inc., American Banker, and Financial Week. He lives in Brooklyn, New York.