Rate Hike: WSJ Prime Rate Goes Up By 0.25 Percentage Points Despite Fuel Prices, A Dismal Jobs Outlook and Hurricane Woes

Lots of folks down South are hurting due to the devastation wrought by Hurricane Katrina. With Hurricane Rita now churning and building strength in the Gulf and higher fuel prices across the country, many experts were predicting that The Fed would give their rate hike strategy a rest. After all, lots of people are going to need to borrow funds in order to rebuild their homes and businesses. And high fuel costs are putting an extra strain on a wartime economy.

But The Fed, in all their inflation-curbing wisdom, decided to stick to their proverbial guns and raise rates again (Board member Mark W. Olson was the only person to vote for no change to the fed funds target rate at the September 20, 2005 FOMC meeting--That's how I would have voted!) Let's hope they're right about this increase, because the economy isn't looking that great to me! Personal debt is at an all time high and the economy is expected to lose 400,000 jobs within the next 4 months. Hurricanes, debt, fuel prices, jobs, wars...and now a rate hike. Only time will tell if increasing the cost of money was a good move for the America of fall, 2005.

Within the next day or so, the US Prime Rate will rise by 25 basis points to 6.75%. The corresponding Fed Funds Target Rate is now 3.75%. Here's a piece of the Federal Open Market Committee's * press release:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent.

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.

While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

NB1: On Monday, September 19, 2005, the cost for a barrel of light sweet crude rose by more than $4, a singular event, as this was the largest price jump to ever occur on a single day for a barrel of the light sweet stuff.

NB2: The Dow Jones Industrial Average fell by just over 76 points in response to the recent Fed rate increase.

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An Adjustment to The 2006 Federal Open Market Committee (FOMC) Meeting Schedule

A change to the 2006 Federal Open Market Committee (FOMC) meeting schedule was announced today. The schedule change is related to the conclusion of Dr. Alan Greenspan's term as Chairman of the Board of Governors of the Federal Reserve System.

Basically, the Committee doesn't want to have any meetings with 2 Fed Chairmen, so Mr. Greenspan will attend his last FOMC meeting on Tuesday, January 31, 2006, which is the same day that he is set to officially step down.

Here's a snippet from today's release:

"The Federal Open Market Committee on Friday announced a change in its tentative meeting schedule for 2006.

The Committee plans to hold its first scheduled meeting of the year on Tuesday, January 31. It had previously planned to meet for two days: January 31 and February 1. This schedule change avoids a meeting that spans the terms of two Chairmen.

In keeping with past practice, Chairman Greenspan plans to attend this meeting."

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Federal and State Banking Agencies Do Their Part to Help Hurricane Katrina Victims

Today, Fed Governors, the Federal Deposit Insurance Corporation, the National Credit Union Administration and other banking agencies have together released a statement urging insured depository institutions (i.e. banks, credit unions, savings & loan, etc.) to implement temporary measures that will make life a little easier for hurricane-affected banking customers. Details can be found below in the following snippet from today's press release:

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (the agencies), and the Conference of State Bank Supervisors are asking insured depository institutions to consider all reasonable and prudent steps to assist customers' and credit union members' cash and financial needs in areas affected by Hurricane Katrina. The agencies are working with state regulatory agencies, financial industry trade groups, and affected financial institutions to identify customer needs and monitor institutions' restoration of services.

The agencies remind the public that deposit insurance is in full force and that money in FDIC- or NCUA-insured accounts is protected by federal deposit insurance. The agencies also note that a priority is to provide customer access to deposit accounts and other financial assets. Many financial institutions are implementing contingency plans, including procedures for consumers to have access to ATMs and use of their debit cards.

The financial services community through its various trade associations is working together to assist affected institutions. The agencies encourage financial institutions to assist affected institutions and consider all reasonable and prudent actions that could help meet the critical financial needs of their customers and their communities. To the extent consistent with safe and sound banking practices, such actions may include:

• Waiving ATM fees for customers and non-customers
  
  
• Increasing ATM daily cash withdrawal limits
  
  
• Easing restrictions on cashing out-of-state and non-customer checks
  
  
• Waiving overdraft fees as a result of paycheck interruption
  
  
• Waiving early withdrawal penalties on time deposits
  
  
• Waiving availability restrictions on insurance checks
  
  
• Allowing loan customers to defer or skip some payments
  
  
• Waiving late fees for credit card and other loan balances due to interruption of mail and/or billing statements or the customer's inability to access funds
  
  
• Easing credit card limits and credit terms for new loans
  
  
• Delaying delinquency notices to the credit bureaus
  

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