The Federal Reserve unanimously voted to increase the federal funds
rate to 3.25% and the discount rate to 4.25%. Both rates were increased
a quarter-percentage point for the ninth straight time.
This increase is designed to continue removing stimulas from the
economny. While the economy seems to be slowing, much of the bad news
is coming from high energy prices. Dispite this, the fed feels that,
“the expansion remains firm and labor market conditions continue to
improve gradually.” As a result, “the committee believes that policy
accommodation can be removed at a pace that is likely to be measured.”
The Fed is expected to stop raising rates, but has been vague about
timing. They will stop when they deem the fed funds rate to be
“neutral,” neither slowing growth nor stimulating inflation. Economists
say a neutral fed funds rate lies somewhere between 3 percent and 5
percent but policy-makers have been loath to pin that down as they
assess incoming economic data. After cutting rates 13 times through
June 2003 to a 1958 low of 1 percent, the Fed last June started
removing stimulus from the economy through a series of gradual
increases.
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