Will Fed boost interest rate <i>half</i> a point?

Chris Farrell

TEXT OF INTERVIEW

SCOTT JAGOW: Today, the Federal Reserve will likely raise short-term interest rates again. This would be the 17th quarter-point hike in a row yada yada yada. But wait, will it be a quarter-point? Our economics correspondent Chris Farrell says there's a chance it'll be half a point.

CHRIS FARRELL: So, in other words, the benchmark interest rate instead of going to 5 and a quarter percent would jump to 5 and a half percent. And in recent days this discussion has gained some credibility. It's still a remote possibility, but if you look at the prices in the market, there are still some people who believe it's going to happen.

SCOTT JAGOW: Now what's the difference between a quarter point hike and a half point hike?

CHRIS FARRELL: Oh, the difference is enormous. We're at a situation where this drib and drab of raising that benchmark interest rate, you know, isn't satisfying the inflation hawks. The inflation hawks are still concerned. And some of those inflation hawks are among the Fed governors. So the thought is the new Fed chairman Ben Bernanke, in order to boost his credibility, has to make a more dramatic statement, raise it by half a percentage point and convince all those inflation hawks that he is willing to be tough against inflation.

SCOTT JAGOW: But what's the immediate impact of doubling the amount that would be added to the short-term interest rate?

CHRIS FARRELL: Well, it would just run through adjustable rate mortgages, the prime rate, it would have a pretty dramatic impact on the markets because, I mean, the bond market for example. Corporate bond market? It's in a bear market. The spillover effect on the fixed income markets would be fairly dramatic. It would have international repercussions if the US made a dramatic move like that. The spillover effect in Mexico and a number of developing countries that are tied to the US dollar, that would have a spillover effect. the psychological impact would be huge.

SCOTT JAGOW: So if the Fed does go with the half-point move, is that it? Are we done?

CHRIS FARRELL: Oh no, we're back to this whole discussion. Now the theory is, if they move the half point, that the Fed has actually bought itself room to take a pause. So yes, if they do the half-point move, my guess is we do not see a rate hike in August when the Fed meets.

SCOTT JAGOW: Sure we've heard that before.

CHRIS FARRELL: I know, I know but hey they have to stop at some point and history suggests if they don't, they're going to send this economy into a tailspin and they don't want to do that. So again if the Fed doesn't want to move in August, one way to achieve that goal is the half-point move. However, having said that, I'm still going to put my money on a quarter-point move.

SCOTT JAGOW: Alright Chris, thanks a lot.

CHRIS FARRELL: Thank you.

SCOTT JAGOW: Chris Farrell is the Marketplace economics correspondent. In Los Angeles, I'm Scott Jagow. Thanks for listening, have a great day.

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