Now the US Federal Reserve has put financial markets on notice that it may raise interest rates, it faces the delicate task of deciding where it wants US borrowing costs to go and how quickly to take them there.
Analysts said the Fed will aim for a "neutral" level of interest rates that will neither push too hard on the economic gas pedal nor hit the brakes on the fledgling expansion.
Wherever that ideal level of interest rates may lie, most private economists feel certain it is definitely above the current 1.75 percent, a 40-year low for the key federal funds rate that influences other lending rates.
"The 1.75 percent rate just sticks out like a sore thumb. You look at it and you wonder, `Why is it there?'" said Chris Rupkey, economist at Bank of Tokyo/Mitsubishi in New York.
But Rupkey noted that opinions range about where the Fed needs to take the rate, with some economists eyeing the 2.75 percent to 3 percent area and others suggesting borrowing costs eventually may need to climb as high as 4.5 percent.
Economists said the 1.75 percent rate seemed appropriate a few months ago when prospects appeared more dicey for the economy, which was facing the double-whammy of a business-led downturn and the blow to confidence from the Sept. 11 attacks.
But with the economy now cruising along at an annual rate that some estimate could be close to 5 percent, the rate seems too low and the Fed itself has described its policy stance as "accommodative."
The US Federal Reserve on Tuesday left interest rates untouched but issued a statement abandoning its 15-month-old warning that excessive weakness was the main economic threat. It instead adopted a more balanced position that views excessive economic weakness and overheating as roughly equal risks.
The Fed went further to state the economy was "expanding at a significant pace," although it said there were still some uncertainties about how well spending demand would hold up in the coming months.
The shift in language does not commit the Fed to boosting rates but economists said it was a necessary first step to psychologically prepare financial markets for such a move.
Markets sold off sharply on Wednesday as investors digested the rhetorical shift and braced for higher rates ahead. Many believe that barring a dramatic setback for the economy over the next few months, higher rates are inevitable.
A poll by Reuters taken following the Fed meeting showed that all 24 of the major government bond dealers think policymakers will keep interest rates steady at the next meeting on May 7. But a majority -- 14 of the 24 -- expect a rate increase at the June 25-26 meeting.
The poll did not suggest analysts expect a very aggressive rate-rising campaign. Many of the firms were eyeing the 2.25 percent to 2.75 percent region, with some viewing 3 percent as a likely area for rates to end the year. Even a 3 percent fed funds rate at the end of this year would constitute a far more gradual pace of rate moves than last year, when the Fed hacked 4.75 percentage points off overnight rates.
James Glassman, economist at J.P. Morgan in New York, said while the Fed will eventually want to get to a neutral level of interest rates that is neither too loose nor too restrictive, there is no urgency to do so quickly because inflation is low. "The pattern that we've seen with the Fed, because of this low inflation, is that they've been tended to be cautious about moving rates up, but as we saw last year they can be quick to respond when there is an [economic] downturn," Glassman said.
In its last credit tightening cycle, which extended from mid-1999 to mid-2000, the Fed bumped up rates six times by a total of 2.75 percentage points to 6.50 percent. All but one of those increases were in quarter-percentage-point increments.
By contrast, only three of the 11 rate cuts in 2001 were quarter-point moves while the other eight were more aggressive half-point reductions.
For his part, Glassman pegged the neutral level of interest rates at around 4.5 percent but said it probably won't be necessary for rates to hit that level until the jobless rate falls from its current 5.5 percent rate to "full employment."
RETHINK? The defense ministry and Navy Command Headquarters could take over the indigenous submarine project and change its production timeline, a source said Admiral Huang Shu-kuang’s (黃曙光) resignation as head of the Indigenous Submarine Program and as a member of the National Security Council could affect the production of submarines, a source said yesterday. Huang in a statement last night said he had decided to resign due to national security concerns while expressing the hope that it would put a stop to political wrangling that only undermines the advancement of the nation’s defense capabilities. Taiwan People’s Party Legislator Vivian Huang (黃珊珊) yesterday said that the admiral, her older brother, felt it was time for him to step down and that he had completed what he
Taiwan has experienced its most significant improvement in the QS World University Rankings by Subject, data provided on Sunday by international higher education analyst Quacquarelli Symonds (QS) showed. Compared with last year’s edition of the rankings, which measure academic excellence and influence, Taiwanese universities made great improvements in the H Index metric, which evaluates research productivity and its impact, with a notable 30 percent increase overall, QS said. Taiwanese universities also made notable progress in the Citations per Paper metric, which measures the impact of research, achieving a 13 percent increase. Taiwanese universities gained 10 percent in Academic Reputation, but declined 18 percent
CHINA REACTS: The patrol and reconnaissance plane ‘transited the Taiwan Strait in international airspace,’ the 7th Fleet said, while Taipei said it saw nothing unusual The US 7th Fleet yesterday said that a US Navy P-8A Poseidon flew through the Taiwan Strait, a day after US and Chinese defense heads held their first talks since November 2022 in an effort to reduce regional tensions. The patrol and reconnaissance plane “transited the Taiwan Strait in international airspace,” the 7th Fleet said in a news release. “By operating within the Taiwan Strait in accordance with international law, the United States upholds the navigational rights and freedoms of all nations.” In a separate statement, the Ministry of National Defense said that it monitored nearby waters and airspace as the aircraft
UNDER DISCUSSION: The combatant command would integrate fast attack boat and anti-ship missile groups to defend waters closest to the coastline, a source said The military could establish a new combatant command as early as 2026, which would be tasked with defending Taiwan’s territorial waters 24 nautical miles (44.4km) from the nation’s coastline, a source familiar with the matter said yesterday. The new command, which would fall under the Naval Command Headquarters, would be led by a vice admiral and integrate existing fast attack boat and anti-ship missile groups, along with the Naval Maritime Surveillance and Reconnaissance Command, said the source, who asked to remain anonymous. It could be launched by 2026, but details are being discussed and no final timetable has been announced, the source