FOMC

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The
Committee sees growth as likely to moderate to a more sustainable pace,
partly reflecting a gradual cooling of the housing market and the
lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities
appears to have had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit labor costs
in check, and inflation expectations remain contained. Still, possible
increases in resource utilization, in combination with the elevated
prices of energy and other commodities, have the potential to add to
inflation pressures.

The Committee judges that some further policy firming may yet be
needed to address inflation risks but emphasizes that the extent and
timing of any such firming will depend importantly on the evolution of
the economic outlook as implied by incoming information. In any event,
the Committee will respond to changes in economic prospects as needed
to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack
Guynn; Donald L. Kohn; Randall S.
Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M.
Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a
25-basis-point increase in the discount rate to 6 percent. In taking
this action, the Board approved the requests submitted by the Boards of
Directors of the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Dallas, and San Francisco.

Popularity: 4%

Interest Rate Comments from Morgan Stanley Chief Economist

"As always, central banks are in ultimate control of the liquidity spigot. And policy ‘normalization’ is now the over-arching objective for the Federal Reserve, the European Central Bank, and the Bank of Japan. For different reasons, each of these monetary authorities had to run policies of extraordinary stimulus in recent years — the Fed in response to the post-bubble shakeout of 2000-01, the ECB in response to Europe’s fierce structural headwinds, and the BOJ in response to nearly a decade of corrosive deflation. With those risks perceived as now subsiding, all three central banks are seeking to end their extraordinary accommodation and put their policies on a more neutral setting. The Fed has obviously made the most progress in doing so, whereas the increasingly tough-talking BOJ has yet to act. The ECB is somewhere in-between. But there can be no mistaking the endgame that is now coming into focus: To the extent that a powerful upsurge in the global liquidity cycle has been fueled by extraordinary monetary accommodation, those days are coming to an end."

Stephen Roach

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