Chairman Alan Greenspan and his 11 voting colleagues on the Federal Open Market Committee (FOMC) raised the influential federal funds target rate to 2.5% on Feb. 2, some 25 basis points higher than it had been since December last year. It was the FOMC's sixth consecutive 25-basis-point increase in the last nine months.
As expected, the statement announcing the increase reiterated the FOMC's belief that federal funds target rate can continue to rise at "a pace that is likely to be measured." It's generally believed the FOMC will raise the target rate 25 basis points at a time at least through June. That would bring the target rate to 3.25% at midyear.
But check what Greenspan is saying to Congress in a couple of weeks. He's slated to testify before the House and Senate on Feb. 16 and Feb. 17. Specifically, check what he's saying about inflation and GDP growth. Raising the federal funds rate should help keep U.S. inflation under control. But it also reduces growth stimulus. In its Feb. 2 statement, the FOMC said, "Output appears to be growing at a moderate pace despite the rise in energy prices, and labor markets continue to improve gradually. Inflation and longer-term inflation expectations remain well-constrained."
