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Answer:
Dear
Mr. Schultz,
You
wrote your question before the Federal Reserve Board's
last meeting which took place last Tuesday. At that
time, the Board increased interest rates for the 13th
straight time since 2004. Officials voted on Tuesday
to raise interest rates a quarter of a percentage
-- to 4.25%. (On June 30, 2004, rates were at 1.24%.)
It's
important to realize that this is the highest rates
have been since the spring of 2001.
Will
they be raised yet again in the New Year? No one knows
the answer absolutely. However, given that in the
official post meeting discussion, the Chairman, Alan
Greenspan, did not use the phrase "interest rate policy
accommodation." This could be important because in
the past the Fed has used that phrase to indicate
that low rates were stimulating our economy. In other
words, the Fed's aim to keep the economy well balanced
has been or has just about been accomplished.
In
other words, it appears (but please note that I'm
hedging here and using the word "appears") that the
Fed may believe that rates are just about right --
that they are neither overheating the economy nor
slowing it down. Officials also said in the post-meeting
statement that although the economy is "solid" it's
likely that "further measured policy firming is likely."
I
take that to mean that there might be one more increase
-- in the January meeting -- perhaps two.
Shortly
after the Tuesday meeting, major banks reacted by
increasing the prime rate to 7.25%. You know that
long term that translates into slightly higher interest
on savings accounts, money market funds and bank CDs.
The average one-year bank CD is about 3.26%, the highest
since September 11,2001.
Mortgage
rates, however, have fallen slightly since the Fed's
meeting. This is because lenders anticipate that continual
interest rate increases are slowing down. The average
30-year fixed rate mortgage dropped from 6.39% to
6.34%; the average 15-year rate also declined slightly.
Although
rates appear to be at what economists call a "neutral
level," keep in mind that if inflation starts to take
off, the Fed will undoubtedly consider it necessary
to increase rates to keep it at bay.
Bottom
Line: As you probably noticed, those holding stocks
are pleased with the idea that the cycle of rate increases
is seemingly coming to an end. The Dow Jones industrial
average rose 55.95 points to 10,832.72 based on Tuesday's
news.
Good
time to hold solid, well-performing stocks.
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