Fed raises interest rates

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent.

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. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. [emphasis mine.] Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

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. [emphasis mine.] Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

The Fed, as expected, raised its target for the Fed Funds rate 25 basis points. The market had become focused on whether the Fed would remove the phrase 'measured' pace from its statement. As you can see above they left that in. However, the FOMC was more hawkish than expected changing its characterization of 'output' in the economy from moderate to solid. The new reference to inflation pressures also caught market slightly wrong-footed. 10 year Treasury yields have backed up from 4.48% before the announcement to a high of 4.64% and stays bid. The Fed, which had, expressed interest that long term rates had not risen, is likely to be pleased with this development. Higher long-term rates will adversely impact real estate prices, housing starts and associated business in the economy and will have a braking effect on the economy.

Below is the February 2nd statement for comparison.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-1/2 percent.

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. Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Inflation and longer-term inflation expectations remain well contained.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, 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.