FED SOURCES: STOCK SURGE HAD BEARING ON DUAL FED RATE HIKES
By Steven K. Beckner
JACKSON HOLE, Wyo. (MktNews) - Wall Street's strong rally in the days leading up to the August 24 Federal Open Market Committee meeting had a significant bearing on Federal Reserve policymakers' decision to raise both the discount and federal funds rates, sources confirm.
Had stocks not surged as much as they did in advance of the FOMC meeting, it is quite possible committee members would have contented themselves with a 25 basis point increase in the funds rate, instead of also raising the discount rate by the same amount, sources indicated.
At the same time, sources said the dual rate action was not considered to be, or meant to be read as, aggressive. While raising the two rates, the FOMC also adopted a symmetrical directive and issued a statement saying that the cumulative rate hikes of June 30 and Aug. 24 "should markedly diminish the risk of rising inflation going forward."
Sources made clear the FOMC wanted to move cautiously, in measured steps, neither taking lightly potential inflation pressures and imbalances nor signaling alarm. But with stock, as well as bond prices, moving up strongly in anticipation of nothing more than a 25 basis point move, the consensus was that something more was needed, without overreacting, they said.
As one official put it, there are times when some aspects of the economic and financial picture become more important in the Fed's calculations than others. And the bullish behavior of stock investors came into greater play at the most recent FOMC meeting.
"We have to make monetary policy for the whole economy, but do we know what the stock market is doing? Yes, we do," said a policymaker.
A majority of FOMC members, as well as central bankers from around the world, have gathered for the Kansas City Federal Reserve Bank's annual conference, and one of the themes of this year's symposium is the extent to which asset price bubbles bear on the conduct of monetary policy. |
