The Federal Reserve, the U.S. central bank, Tuesday raised short-term interest rates for the 12th consecutive time in the past 17 months. The move is intended to blunt the inflationary impact of higher oil and gasoline prices.
The rise in the overnight fed funds rate to four percent was not a surprise. Short-term interest rates have been notched up at quarter point (percent) increments from the very low level of one percent that prevailed until mid-2004.
Higher short-term rates have an impact on consumers and businesses alike by raising the cost of borrowing. Consumers pay more on their credit card debt. The housing sector is particularly sensitive to changes in interest rates, as purchases of homes and apartments typically require substantial borrowing.
Robert McTeer, a former Federal Reserve Board governor who now heads Texas A & M University, says he worries further rate increases could trigger a downturn in America's booming U.S. housing market.
"I believe we're getting into risky territory. I believe they'll stop at four and a half percent. I hope so," he said. "I'd probably be arguing that they should pause right now."
But most analysts believe there is little chance the Fed will stop raising rates before the end of the year. Its statement indicates that the interest rate increases so far have not affected the economy, which grew at 3.8 percent in the previous quarter.
The independent U.S. central bank is entering a period of transition as long-serving Chairman Alan Greenspan is retiring at the end of January. President Bush, last week, nominated former Princeton University professor Ben Bernanke to succeed Mr. Greenspan.