The U.S. central bank, the Federal Reserve, Tuesday raised short-term interest rates to a four-year high of three and a half percent. The Fed believes higher rates will dampen the inflationary pressures coming from higher oil prices.
It is the tenth consecutive quarter point rise in short-term rates over the past 14 months. Higher rates mean that many consumers are paying more on their home mortgages and credit card debt. Just in the past year, higher rates have added $70 a month to the interest payment on a $15,000 home equity loan.
The Fed statement suggests there may be more rate hikes ahead. It says despite higher energy costs the economy is continuing to expand at a brisk pace. Last Friday, the government reported that the growing economy created over 200,000 jobs during the month of July. Robert McTeer, the former chief of the Federal Bank in Dallas, is surprised that growth is so strong in the face of a 40 percent increase in the price of gasoline over the past year.
"A few months ago I would have said that over $60 dollars [per barrel] oil was more important than it [now] appears to be," he explained.
Bill Gross, managing director at San Franciso based Pimco, a bond trading company, believes this tightening phase in monetary policy is nearly complete. If rates go too high, he says, there could be trouble in the housing market.
"The housing market is the key going forward," he explained. "I think a lot of the growth that we've seen in the past quarter has been due to one off type of factors-in terms of discounts [offered] in autos, and those types of things, and obviously the equitization [getting cash from rising asset values] from housing. So I think the economy is about to slow."
Several analysts believe that the 40-year low in interest rates in the early part of the decade triggered what may be a bubble in housing prices. Mr. Gross believes that if rates go too high, that bubble could burst.
For now the U.S. economy is continuing to expand at about a four percent annual rate. Inflation, says the Fed, continues to be constrained.
