Capital Markets

Fed Hikes Funds Rate 25 Basis Points

Some onlookers had hoped for a delay in the increase to allow the economy to pick up steam following last week's strong jobs outlook.
Stephen TaubNovember 11, 2004

The Federal Reserve yesterday raised the federal funds rate by 25 basis points to 2 percent. It also boosted the discount rate by 25 basis points, to 3 percent.

While the moves didn’t come as much of a surprise, some observers were hoping the Fed would hold off on the hikes to allow the economy to pick up added momentum on the heels of last week’s very strong jobs report.

Nevertheless, most stock indices surged shortly after the early-afternoon announcement.

“It was exactly as expected, basically a repeat of the statement they made last time,” Jim Awad, chairman of Awad Asset Management, told cbsmarketwatch.com. “The economy remains strong, the labor market’s improved, inflation expectations remain contained.”

Noting that “the stance of monetary policy remains accommodative,” the Federal Open Market Committee said in a press release that it doesn’t believe that inflation poses a big problem,

To help build robust underlying growth in productivity, the FOMC intends to provide ongoing support to economic activity. “Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved,” the Fed stated.

As a result, inflation and longer-term inflation expectations remain well contained, it added.

This is the fourth time the Fed has raised rates since it began the tightening at the beginning of the summer.

“The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal,” it added in its statement. “With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.”

“This shows they’re satisfied at the moment that the economy is growing satisfactorily and that inflation is under very good control,” Lyle Gramley, a former Fed governor and now an adviser at Washington Research Group, told Bloomberg. “It also increases the odds” of a December increase, he added.

In reaction to the Fed’s move, many banks are likely to raise the prime rate, a benchmark for their lending rates.

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