Fed Hikes Interest Rates Again

The Federal Open Market Committee Meeting raised interest rates in America 0.25% yesterday. This is the ninth straight meeting that has resulted in increased interest rates. This was not a surprise, but the tea-leaf readers on Wall Street focused not on what was said but how it was said. They needn’t have bothered; there will be more rate hikes in the future.

The current overnight rate, officially called the fed funds rate, is now 3.25%, its highest level since September 2001. The economy is certainly in much better shape now than it was then, but oil has roughly doubled in price in the last year and a half, there’s worries about a housing bubble (which isn’t popping anytime soon, if it exists at all), and consumer spending in May was flat. In short, the picture is a bit mixed, and keeping rates level might have made more sense. In fairness to the fed, its target for inflation is lower than the one preferred here; this journal believes higher inflation would allow more monetary tools to combat any instability in the event of another major terrorist attack against the US.

But Wall Street lives on “buy the rumor, sell the fact.” Investors and speculators will take positions based not on this latest move by the Fed but on perceptions of the fed funds rate decision at the next FOMC meeting scheduled for August 9. In its statement yesterday, the Fed all but guaranteed another 0.25% (25 basis point) increase. The important part of the brief statement said:

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. 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. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.