Fed Raises Rates, Now What?

Financial markets figure that the U.S. Federal Reserve is on an indefinite hold after the Nov. 16 increase in short-term interest rates. The federal Open Market Committee boosted the federal funds rate 25 basis points to 5.5% and the discount rate 25 basis points to 5% in an effort to keep inflation in check. "At a minimum, we believe that the Fed is on hold at least through next March," states Merrill Lynch & Co., New York. But the investment firm also believes that Chairman Alan Greenspan and his Fed colleagues will be keeping a very close eye on unemployment numbers during the next several months. "The Fed's greatest worry is that the U.S. is simply running out of warm bodies. So for policy to remain on hold going forward, the unemployment rate can't fall much further. If the unemployment rate falls below 4%, more Fed tightening would probably occur next year."