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Economists Expect Fed to Increase Interest Rates a Half Point

Aired May 16, 2000 - 2:01 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LOU WATERS, CNN ANCHOR: For about a year now, the Federal Reserve has been gently tapping the brakes on the U.S. economy, but five interest rate increases have done little to slow the speeding economic train, and according to the experts, inflation remains a threat. So today, many economists expect the Fed to use a heavier foot on the brake pedal. Instead of a quarter-point increase, they're forecasting a half-point hike. If that happens, and we should know within the next 15 minutes, the prime rate could hit 9.5 percent, its highest level in nearly a decade.

CNN's Patty Davis reports, that's a number that could finally sting consumers.

(BEGIN VIDEOTAPE)

MARY BOEDER, HOME BUYER: And the granite counter top is great.

PATTY DAVIS, CNN CORRESPONDENT (voice-over): Mary and Larry Boeder are shopping for a new home in Chicago, a second home, a weekend cottage.

Rising interest rates are not getting in the way.

LARRY BOEDER, HOME BUYER: I'm not seeing it as a problem yet, because they're still lower than they used to be. You know, years ago they were a lot higher.

DAVIS: That kind of optimism is fueling a strong housing market. It's pushed mortgage applications to the highest level in 18 months. While it may not be worrying home buyers, it's raising eyebrows at the Federal Reserve.

DIANE SWONK, CHIEF ECONOMIST, BANK ONE: The concern is that the pot's boiling, and even as you turn down the heat on that pot, the pot can still boil over. And the Fed is really concerned that we're going to sort of boil over on the pot and have some -- something's going to get burned here.

DAVIS: The Fed's frequent rate hikes in recent months have been aimed at cooling down the red hot economy. Despite the latest report that consumer prices did not go up in April, there's little evidence, so far, the Fed's policy has worked. The economy continued to grow at a rapid 5.4 percent in the first quarter and more people are working. Wages are rising, the unemployment rate is now below four percent for the first time in 30 years. So the Fed, wary those factors could spark inflation, stands ready to do whatever it takes.

SWONK: Will they succeed? My guess is they won't. This train is still moving awfully fast out there.

DAVIS: Fueled in part by plenty of buyers like the Boeders, who say they've paid as high as 13 percent interest on previous homes. So they're not scared off yet.

M. BOEDER: I don't know if it's going to get any better, so...

L. BOEDER: Property values are going up in the city, so we just kind of think the sooner we buy something, the better off we'll be.

DAVIS: Ready to jump in before prices and rates go even higher.

Patty Davis, CNN, Chicago.

(END VIDEOTAPE)

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