Tuesday, December 13, 2005

Fed Raises .25 Once More

"The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.

Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives. "

Full text here


  1. The FED changed its wording and the DOW rises 80 points. However at least 2 more rate hikes are coming- perhaps more.
    The markets are up today- do they really think they have dodged the bullet with this bubble- I think not.

  2. For Ian Shepherdson, chief U.S. economist at High Frequency Economics, that "something" may be employment. In his view, the most interesting part of the Fed's statement was the central bank referring to "possible increases in resource utilization," Fed-speak for the declining unemployment rate, as a driver of future core inflation for the first time in its 18-month long tightening cycle.

    "We think this is extremely important, because it signals that the labor market has now moved again to center-stage in the Fed's analysis and policy making process," Shepherdson wrote in a research note.

    A strong November employment report was instrumental in pushing the case that a strong economy will keep the Fed tightening into 2006, even if inflation has remained subdued.

    Shepherdson believes the Fed will take the Fed funds rates to 4.75%, implying two more quarter-point rate hikes by March 28. If the unemployment rate continues falling, the Fed may have to move higher, Sheperdson says. "We think this will not be necessary because we expect a huge crunch in the housing market, but the battle lines are being drawn."

  3. Shepherdson's analysis makes sense. Feds in my analysis are more likely to stop at 4.5%.

  4. Shepherdson two months ago predicted a 'meltdown' in housing, which would cause a recession in late 2006 or in 2007. These statements today seem to reiterate his October predictions on housing. Watch the panic begin in the spring- they will be rushing out the doors. I feel for many of these people- but an economic downturn will hurt ALL of us.