Fed Raises Rates 25 Basis Points By David A. Gaffen Staff Reporter 2/2/00 2:14 PM ET

Making good on what was all but promised, the Federal Open Market Committee today announced a 25-basis-point increase in the target federal funds rate, to 5.75% from 5.5%. All 30 of the 30 primary dealers were expecting this move, according to Reuters, and the increase is the Fed's fourth such move in seven months.

The market was resigned to this move, due to consistent strength in the economy through the Y2K date change and recent reports that suggest that price and wage inflation may be picking up, albeit slightly.

Fed officials in recent weeks had adopted a tougher-talking stance on the economic outlook, warning repeatedly of the inflation risks posed by the current pace of demand. In its statement on today's hike, the FOMC said:

The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion. Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

Unlike with all of the rate-snugging moves undertaken by the Fed in 1999, the broader market isn't holding its collective breath that this will be the last rate hike by the Fed for the foreseeable future. The most recent Reuters poll shows 22 of 30 primary dealers forecasting another 25-basis-point move at the next FOMC meeting, March 21.

Last week both the fourth-quarter Employment Cost Index and the GDP reports displayed signs of inflation, as did the price index contained in yesterday's National Association of Purchasing Management Purchasing Managers' Index. The cost inflation still stems mainly from rising energy costs, but the significant rise in the price index (to 72.6 from 68.3) has in the past coincided with a more aggressive approach from the Fed.

Some in the market believed that these data gave the Fed enough motivation to respond with a 50-basis-point increase. The Fed, in the middle of tightening cycles, has done this before, most recently in 1995, at the end of the 1994-95 round of tightening. However, some economists pointed out that it's yet unclear how much of the economic strength at the end of the year was Y2K-related.

The fed funds rate is the rate member banks charge each other for overnight loans. The Fed keeps it in line with its target through open market operations -- buying and selling government securities so the money supply matches demand at that level.

The Fed also hiked the discount rate, to 5.25% from 5%. The discount rate is the rate member banks are charged to borrow from the Fed's discount window.

-- James (brkthru@cableone.net), February 02, 2000

Answers

And since the announcement, there's been a SERIOUS roller Coaster ride on wall street. Hard to say which way it will go. Any insight, James?

-- Duke1983 (Duke1983@aol.com), February 02, 2000.

Duke, it will go down, unless it goes up. Don't ask me how I know.

-- (@ .), February 02, 2000.

Duke:

It just pumped more fog into never never land.

-- James (brkthru@cableone.net), February 02, 2000.

Markets fell out of bed right after the announcement, then bounced at or near session lows and have been climbing pretty steadily ever since. Looks like a more "normal" chart: Dow and S&P up about .5 to .75% and the Nasdaq COMP up 1.8%. In other words, the markets have behaved since the announcement in the same manner as they have for most of the past couple of years.

The exuberance continues, it appears...

-- DeeEmBee (macbeth1@pacbell.net), February 02, 2000.

The Federal Reserve raised short-term interest rates by a quarter point Wednesday in an effort to slow the U.S. economy and ensure that inflation doesn't flare out of control. BWAHAHAHAHAHA!

What a damn joke!

-- Teague Harper (tharper@cyberhighway.net), February 02, 2000.

OK, now THAT was weird: the evil twin to last week's "skyrocket just before the close".

Everyone's cruising along at a nice altitude, everything 5x5, right up to around 3:30, and then they make like Wile E. Coyote just after he realizes that he is in fact standing in mid-air. Heck, give the Dow another 15 minutes and it would have hit session lows.

What the heck was that?

-- DeeEmBee (macbeth1@pacbell.net), February 02, 2000.

The markets (Drum Roll please!) will FLUCTUATE

-- I know the markets (can.I.be.your@broker.please), February 02, 2000.

To Whom It May Concern:

Mr. A. Greenspan is the epitome of the old saying, "If you blind them with brilliance, baffle them with BS." Listen to such people at your peril.

-- bz (beezee@statesville.net), February 02, 2000.

I know the markets- LMAO!!!Thank You!

-- Gia (laureltree7@hotmail.com), February 02, 2000.