As Expected, The FOMC Raises The Fed Funds Rate By 25 Basis Points; Prime Rate Now @ 7.25%

Today's interest rate hike comes as no surprise to many of you rate watchers, as many experts have been predicting a 25 basis point increase to the Fed Funds Rate for today. The Fed Funds Rate is now 4.25%, and, by tomorrow morning, the published Fed Prime Rate will rise to 7.25%. Many of the nation's largest banks have already issued a press release to let the world know that their prime lending rate is now 7.25%.

Today's rate increase is the 13^th rate hike in a row by The Fed, and many are now wondering whether The Fed will raise rates again when the FOMC meets at the end of January, 2006. Many economists think that the target for The Fed Funds Rate is 4.5%, which would mean at least one more 0.25 percentage point increase to The Fed Funds rate come January. However, there are also some economists who believe that Ben Bernanke--the man who will take over as Fed Chairman early next year--will perhaps want a Fed Funds Rate target of 4.75 or even 5 percent. It really depends on how the country is doing, from an inflation point of view, when Bernanke officially takes the helm on February 1, 2006.

Here's a snippet from the press release that has just been issued by the FOMC:

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.

Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco."

Yup, money just got a bit more expensive, but money isn't everything, right? Happy Holidays to all from the Prime Rate Blog!

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