The U.S. central bank, the Federal Reserve, Wednesday raised short-term interest rates by another one-quarter percent, the sixth consecutive rise in overnight rates since last June.
The Federal Reserve says because the economy continues to grow at a brisk pace, it can continue to take away the monetary stimulus that has been in place for several years. The Fed aggressively cut rates in 2001 and 2002, taking them down to 50-year lows to stimulate economic activity and offset the recessionary impact of the September 11th terrorist attack.
The quarter-point rise brings short-term rates to a still-low 2.5 percent. Consumers with credit card or other short-term debt pay more when rates rise. Longer-term rates, despite rising short-term rates, remain largely unchanged with the 10-year government bond yielding about four percent interest.
Bill Gross, a respected San Francisco-based bond trader, says he expects short-term rates will continue to rise.
"If the economy continues to grow at a three percent plus rate, then the Fed is going to ratchet up to what I believe will be a three percent [fed funds] rate,” he said. “We need a slower economy for the Fed to stop."
Despite large trade and fiscal deficits, the U.S. economy grew by four percent last year and that pace of growth is continuing. Financial markets are eager for Friday's jobs report from the labor department to see if job growth, dormant through much of 2004, is rebounding.
