Tuesday, December 13, 2005

FOMC raises rates

The Federal Reserve Open Markets Committee (FOMC) voted unanimously to raise the federal funds rate 25 basis points or one-quarter of one percent at its meeting today. The Fed Funds rate now stands at 4.25%. The FOMC, as expected, also dropped the word "accommodative" from its statement of the interest rate environment. This is a signal that an end to rate hikes is closer though not immediate as this phrase indicates:

The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

The market currently is pricing in another 25 basis points for the January 31 meeting [Greenspan's last] and gives about a 75% chance of another 25 basis points at the March 28 meeting. As long as the economy is steaming along rate hikes make sense as they allow the Fed to 'reload' - they'll be able to have more room to cut when its next required.

Here's Larry Kudlow's take on the move - he's quite bullish.

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