Fed Raised The Rate ...

As usual and as predictably as it happens, the Federal Reserve raised its
target for the short-term federal funds rate by a quarter of a percentage
point, to 3.5%. Beginning June 30, 2004, the Fed's rate-setting Open
Market Committee has met 10 times; it has raised the federal funds rate
a quarter-point each time. The Fed meets three more times in 2005 :
Sept. 20, Nov. 1 and Dec. 13. And most people predict that the rate would
rise in all these three occasions.

What are the immediate or long-term consequences?

-- The rate hikes are used as a tool to fend off inflation which seems to be
well-controlled except for the steep hike in oil price. Rise in oil price may
eat away much of the good work that Greenspan & Co. has done.

-- Banks will increase their prime rates immediately to 6.5%. Rates that
consumers pay on their variable-rate credit cards and home equity lines
of credit will go up in immediate effect because most of those loans are
indexed to the prime rate.

-- Yields on certificates of deposit (CD) probably will continue to rise. As
we are advising over the last six months or so, do not lock your money for
a term longer than 6 months. It is better to put your money in a high yield
savings account like that from the New York based Emigrant-Direct Bank.
Their current yield is 3.5% and no minimum balance is necessary.

--Long-term debt like car loans, mortgages, fixed-rate home equity loans
are likely to rise, but the size and timing of the increases are rather hard
to predict. These types of loans respond more to broad market forces and
not that much on short term rate controled by the Fed.

-- Until a few weeks ago, long-term mortgage rates had been dropping
even as the Fed was raising short-term interest rates. But mortgage rates
have been rising since the Fed's June 30 meeting. That hasn't cooled down
the housing market yet. Be very careful whether you are buying first time
or making a new real estate investment.