Jones Lang LaSalle
Fed Panel Raises Rate to 4.75%
By EDUARDO PORTER
WASHINGTON, March 28 — At Ben S. Bernanke's first meeting as head of the Federal Reserve's policy-making committee, the watchword was no surprises.
As expected, the Federal Open Market Committee raised the benchmark federal funds rate on Tuesday by a quarter of a percentage point, to 4.75 percent, and suggested that at least one more increase was in the cards. It was the 15th such increase in consecutive meetings of the committee.
In its statement describing the decision, the central bank veered little from the Fed's prior assessments of the economy and the expected path of monetary policy, underscoring Mr. Bernanke's stated intention to maintain the course set by his predecessor as Fed chairman, Alan Greenspan.
Despite its predictability, the Fed's statement still modestly unsettled financial markets, bolstering the dollar in foreign exchange markets and sending the prices of stocks and government bonds lower. The broad Standard & Poor's 500-stock index fell 0.64 percent, to 1,293.23. [Page C9.]
Though virtually all investors expected the rate increase, a substantial minority of operators on Wall Street had held hopes that the Fed would indicate that it would be the last one in the cycle that began in June 2004, when the benchmark rate stood at 1 percent. They were disappointed by the clear suggestion that the Fed still saw the need for further tightening.
"He was paving the way for another rate hike," said Mickey D. Levy, chief economist at Bank of America. "He knew full well that with this type of language the market would price in a hike to a 5 percent funds rate."
The Fed's statement relied on words nearly identical to those used after the committee's previous meeting in January, Mr. Greenspan's last after 18 years as head of the central bank. It said that "some further policy firming may be needed" to keep inflation under wraps.
It pointed out that the economy was growing robustly after a slowdown in the fourth quarter of last year. It noted that core inflation, beyond food and energy, had ticked up only modestly, but it warned that the rising prices of energy and other commodities could add to inflation pressures in the future.
Though the committee's statement was pored over by financial analysts for any hint of the new chairman's intentions, the market tremors appeared to have little to do with the new management at the Fed.
Mr. Bernanke is expected to put his own stamp on the central bank eventually. He has long said that he supports more transparency, letting the markets know more clearly how the Fed reaches its decisions and what is the expected path of policy. He has argued in favor of setting a specific inflation target — within a range — to make explicit the Fed's goals.
He apparently judged Tuesday not to be the day for bold moves, however. Untested as Fed chairman, Mr. Bernanke had a clear interest in projecting continuity with the Greenspan Fed.
At most, the new statement provided a mere hint of Mr. Bernanke's desired transparency. "It was the same policy message but with a little innovation in communication," said Laurence H. Meyer, a former Fed governor who is now an economic forecaster at Macroeconomic Advisers in Washington.
The whiff of change came in the second paragraph of the Fed's five-paragraph statement, the passage often referred to as the "snapshot paragraph," in which the committee assesses current economic conditions. It offered a somewhat more detailed analysis of current conditions than the one issued in January.
Significantly, it calmed fears that wage increases might spur inflation by pointing out that productivity gains were holding down the growth in labor costs.
At the same time, the Fed went beyond the expected description of the economy's current status to elucidate what it saw as its likely future path. "Economic growth has rebounded strongly in the current quarter," it said, adding that growth appeared "likely to moderate to a more sustainable pace."
Mr. Bernanke comes to the helm of the nation's central bank at a delicate moment for monetary policy. Since the Fed started increasing interest rates, financial markets have come to expect a quarter-point rise in interest rates at pretty much every committee meeting.
But after 15 consecutive rate increases, the cycle of monetary tightening is reaching its peak as interest rates approach what is seen as a "neutral" rate that is not so high that it slows economic growth but not so low that it allows inflationary fears to come back to life.
With underlying inflation at 1.8 percent, excluding food and energy, the Fed's preferred measure is still within the range of 1 percent to 2 percent considered comfortable by most officials. That leaves the Fed debating how far to raise rates merely to counter the risk of higher inflation as opposed to the reality of prices rising too fast.
In a note to investors, a Goldman Sachs economist, Andrew Tilton, said that "the potential for disagreement on policy decisions increases now that the Fed is roughly at 'neutral' and the data become more important."
With the economy growing at a healthy clip but facing the potential headwind of a weakening housing market, the decision on when to end the cycle of rising interest rates will not be trivial.
The outlook for inflation is slightly worse than in January, with increases in producer prices and consumer price inflation. Payrolls have expanded by some 200,000 a month and retail sales have grown sharply.
Fed economists have argued that a slowing housing market is likely to dampen overall economic growth. Housing, however, is not sinking yet. Sales of existing homes rose in February, housing starts remain strong and by some measures home prices are still rising.
In testimony to Congress last month, Mr. Bernanke argued that in coming quarters the Fed's policy-setting committee "will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy action will be increasingly dependent on incoming data."
Given such uncertainties, mused Ethan S. Harris, chief economist of Lehman Brothers, "Bernanke moved into the job right at the time it got interesting."
Copyright 2006The New York Times
Fed Panel Raises Rate to 4.75%
By EDUARDO PORTER
WASHINGTON, March 28 — At Ben S. Bernanke's first meeting as head of the Federal Reserve's policy-making committee, the watchword was no surprises.
As expected, the Federal Open Market Committee raised the benchmark federal funds rate on Tuesday by a quarter of a percentage point, to 4.75 percent, and suggested that at least one more increase was in the cards. It was the 15th such increase in consecutive meetings of the committee.
In its statement describing the decision, the central bank veered little from the Fed's prior assessments of the economy and the expected path of monetary policy, underscoring Mr. Bernanke's stated intention to maintain the course set by his predecessor as Fed chairman, Alan Greenspan.
Despite its predictability, the Fed's statement still modestly unsettled financial markets, bolstering the dollar in foreign exchange markets and sending the prices of stocks and government bonds lower. The broad Standard & Poor's 500-stock index fell 0.64 percent, to 1,293.23. [Page C9.]
Though virtually all investors expected the rate increase, a substantial minority of operators on Wall Street had held hopes that the Fed would indicate that it would be the last one in the cycle that began in June 2004, when the benchmark rate stood at 1 percent. They were disappointed by the clear suggestion that the Fed still saw the need for further tightening.
"He was paving the way for another rate hike," said Mickey D. Levy, chief economist at Bank of America. "He knew full well that with this type of language the market would price in a hike to a 5 percent funds rate."
The Fed's statement relied on words nearly identical to those used after the committee's previous meeting in January, Mr. Greenspan's last after 18 years as head of the central bank. It said that "some further policy firming may be needed" to keep inflation under wraps.
It pointed out that the economy was growing robustly after a slowdown in the fourth quarter of last year. It noted that core inflation, beyond food and energy, had ticked up only modestly, but it warned that the rising prices of energy and other commodities could add to inflation pressures in the future.
Though the committee's statement was pored over by financial analysts for any hint of the new chairman's intentions, the market tremors appeared to have little to do with the new management at the Fed.
Mr. Bernanke is expected to put his own stamp on the central bank eventually. He has long said that he supports more transparency, letting the markets know more clearly how the Fed reaches its decisions and what is the expected path of policy. He has argued in favor of setting a specific inflation target — within a range — to make explicit the Fed's goals.
He apparently judged Tuesday not to be the day for bold moves, however. Untested as Fed chairman, Mr. Bernanke had a clear interest in projecting continuity with the Greenspan Fed.
At most, the new statement provided a mere hint of Mr. Bernanke's desired transparency. "It was the same policy message but with a little innovation in communication," said Laurence H. Meyer, a former Fed governor who is now an economic forecaster at Macroeconomic Advisers in Washington.
The whiff of change came in the second paragraph of the Fed's five-paragraph statement, the passage often referred to as the "snapshot paragraph," in which the committee assesses current economic conditions. It offered a somewhat more detailed analysis of current conditions than the one issued in January.
Significantly, it calmed fears that wage increases might spur inflation by pointing out that productivity gains were holding down the growth in labor costs.
At the same time, the Fed went beyond the expected description of the economy's current status to elucidate what it saw as its likely future path. "Economic growth has rebounded strongly in the current quarter," it said, adding that growth appeared "likely to moderate to a more sustainable pace."
Mr. Bernanke comes to the helm of the nation's central bank at a delicate moment for monetary policy. Since the Fed started increasing interest rates, financial markets have come to expect a quarter-point rise in interest rates at pretty much every committee meeting.
But after 15 consecutive rate increases, the cycle of monetary tightening is reaching its peak as interest rates approach what is seen as a "neutral" rate that is not so high that it slows economic growth but not so low that it allows inflationary fears to come back to life.
With underlying inflation at 1.8 percent, excluding food and energy, the Fed's preferred measure is still within the range of 1 percent to 2 percent considered comfortable by most officials. That leaves the Fed debating how far to raise rates merely to counter the risk of higher inflation as opposed to the reality of prices rising too fast.
In a note to investors, a Goldman Sachs economist, Andrew Tilton, said that "the potential for disagreement on policy decisions increases now that the Fed is roughly at 'neutral' and the data become more important."
With the economy growing at a healthy clip but facing the potential headwind of a weakening housing market, the decision on when to end the cycle of rising interest rates will not be trivial.
The outlook for inflation is slightly worse than in January, with increases in producer prices and consumer price inflation. Payrolls have expanded by some 200,000 a month and retail sales have grown sharply.
Fed economists have argued that a slowing housing market is likely to dampen overall economic growth. Housing, however, is not sinking yet. Sales of existing homes rose in February, housing starts remain strong and by some measures home prices are still rising.
In testimony to Congress last month, Mr. Bernanke argued that in coming quarters the Fed's policy-setting committee "will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy action will be increasingly dependent on incoming data."
Given such uncertainties, mused Ethan S. Harris, chief economist of Lehman Brothers, "Bernanke moved into the job right at the time it got interesting."
Copyright 2006The New York Times
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