Greenspan Strikes Again

No surprise. The Fed raised rates by 25 basis points.

The Fed raised the overnight bank lending rate a quarter point to 3.75 percent after meeting today in Washington. Fed Governor Mark Olson voted against his nine colleagues to argue that the rate should be held steady, marking the first dissent in a decision since June 2003.
“Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term,” the central bankers said in a statement after the meeting. “It is the committee’s view that they do not pose a more persistent threat.”
The decision shows the Fed remains concerned about potential inflation from energy prices. About 20 percent of the 111 economists in a Bloomberg News survey predicted the Fed might skip an increase today because of risks the economy would slow.
“The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected,” said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in New York, after the decision.
Treasuries fell, pushing the benchmark 10-year note’s yield up 1 basis point, or 0.01 percentage point, to 4.25 percent at 2:49 p.m. in New York. The Standard & Poor’s 500 Stock Index was little changed.

The biggest change is that the Fed slightly altered its language. Before, the central bank had always said that inflation was “well contained.” Now the Fed says that “with underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.”

”Measured” doesn’t mean fast or slow. It’s basically a weak word for “limited.” But I already knew that “accommodation” was eventually coming to end. That’s all the Fed said today. The market expects two more rate increases, and possibly a third. I think we’ll see at least three more rate hikes.

Posted by on September 20th, 2005 at 3:44 pm


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