Fed's Action Renews Threat Of InvertedYield Curve

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WASHINGTON - (05/04/05) -- The Federal Reserve raisedshort-term interest rates again Tuesday by 25 basis points to 3%,in its continued efforts to dampen inflation and economic growth.But the continued rise in short-term rates have had little effectson long-term rates, raising concerns about a continued squeeze oncredit unions and other financial intermediaries. "The risk now isthe inability (of the Fed) to talk up long-term rates," NAFCUeconomist Jeff Taylor, told The Credit Union Journal. He worriedabout the phenomenon known as an inverted yield curve--when shortterm rates are higher than long-term rates. That discourageslonger-term lending and investments because short-term lending andinvesting are more profitable, putting increased pressure on creditunions and other intermediaries. Meantime, Tuesday's Fedaction--the eighth 25 bp hike in the past nine months--is expectedto immediately push up rates for short-term credit union loans likethose for cars and home equity lines of credit, which have risen anaverage of 40 bps and 135 bps, respectively, since the Fed startedits recent rate increasing last June.

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