KNOXVILLE — This week’s quarter-point hike in the prime interest rate signals more increases to come but is unlikely to trigger an economic downturn, a University of Tennessee economist said Friday.
The Federal Reserve Bank boosted the rate that banks charge other banks for overnight loans from 5.5 percent to 5.75 percent, the highest level in four years.
“The national economy has shown increasing signs of inflationary pressure building,” said Dr. Matt Murray of UT’s Center for Business and Economic Research. “Those pressures stem largely from the long sustained path of economic growth and tightness in the nation’s labor markets.
“That’s why we’ve seen the Fed now act on several occasions in the last year raising interest rates.”
Murray said he expects the Fed to raise interest rates another quarter to half a percent before the end of the year in an effort stabilize the economy’s growth.
“The raising of interest rates is expected to have both real and psychological impacts to help stabilize the growth of the economy or reduce that growth slightly, perhaps,” he said. “It’s unlikely that these rate increases will cause the economy to contract or lead the economy into any kind of serious economic downturn.”
Murray said the modest hike will have real effects on such things and mortgage and credit card rates.
“This is a psychological signal to the financial markets that the Fed remains ever vigilant in fighting inflation,” he said.