Prime Rate

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Friday, February 10, 2006

Chicago's Federal Reserve Bank President Says Interest Rates May Need To Go Up Again

Speaking at a meeting of The Risk Management Association of Chicago yesterday, Chicago Federal Reserve Bank President Michael Moskow, who this year will be a non-voting member of the Federal Open Market Committee (FOMC), said:

"...Even with the funds rate in the range of neutral, further changes in policy may be appropriate. My view is that inflation will likely remain contained. Futures markets are not looking for energy prices to move appreciably higher. And, importantly, solid underlying trends in productivity should keep overall production costs in check. But, as I mentioned earlier, there are risks to the inflation outlook—namely, the potential for energy cost pass-through, pressures from increases in resource utilization, or rising inflationary expectations. And with inflation near the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern, while a decline in inflation would be beneficial. My views about policy will depend importantly on how various cost factors play out and affect the outlook for inflation. And if inflation or inflation expectations were to rise persistently, then policy clearly would have to be tightened further. Of course, other events could transpire that result in prospects for inflation and growth that would be consistent with a less-firm policy stance..."

So, basically, though the benchmark Fed Funds Rate is in now within the "neutral range"--neutral being a rate that neither encourages nor curtails U.S. economic growth--The FOMC may feel a need to raise rates again in March if The Committee believes that inflation is rising at an unacceptable pace. The Fed will be paying close attention to items like the unemployment rate, energy prices (crude oil, natural gas, etc.) and the personal consumption expenditures price index. If unemployment remains low, crude prices high and the overall economy appears to be doing great, then another 25 basis point (0.25 percentage point) increase to the Fed Funds Rate may be coming at the end of next month (this, of course, would translate to a 0.25 percentage point increase to the US Prime Rate.)

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