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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (47210)	12/13/2005 2:16:29 PM
From: ild	Read Replies (1) \| Respond to of 110194

DJ Fed Raises Rates 0.25-Pt To 4.25%; Sees Balanced Risks DJ FOMC: "Some Further Measured Policy Firming" Needed DJ FOMC No Longer Describes Rate Policy As Accommodative DJ Fed: To Respond To Changes In Econ Prospects As Needed DJ Fed: Energy Prices Have Potential To Boost Inflation DJ FOMC: Econ Expansion "Appears Solid" Despite Storms DJ FOMC: Core Inflation Low, Expectations Contained DJ Fed: Discount Rate Lifted By 0.25-Pt To 5.25% *DJ FOMC Votes Unanimously To Hike Federal Funds Rate DJ Fed Raises Rates 0.25-Pt; Shifts Policy Language By Brian Blackstone and Deborah Lagomarsino Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--The Federal Reserve on Tuesday raised official interest rates a 13th straight time, as expected, and signaled that it will likely continue to raise rates at a "measured" pace. But by tweaking key language in its policy statement and removing its assessment that policy is accommodative, policymakers signaled that the year-and-a-half long tightening campaign may be approaching its final phase as rates reach a more economically neutral level. The U.S. central bank voted unanimously to raise the Fed funds rate by 25 basis points to 4.25%, the highest level since May 2001. It also lifted the largely symbolic discount rate by one-quarter point to 5.25%. Yet for the first time since the tightening cycle began in mid-2004, the central bank altered key language in its accompanying statement about the outlook for policy, suggesting that policy will be taken off automatic pilot and become more reactive to incoming data. Instead of the phrase, "policy accommodation can be removed at a pace that is likely to be measured" - a fixture since mid-2004 that that became synonymous with steady, quarter-point rate hikes - the Fed stated Tuesday that "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." Speculation that a change was in the offing was fueled when the Fed's Nov. 1 meeting minutes stated, "several aspects of the statement language would have to be changed before long, particularly those related to the characterization of and outlook for policy." To be sure, the economy's strength, coupled with energy-fueled inflationary pressures, should spur another 25 basis point rate hike to 4.5% at the Jan. 31 Fed meeting - Alan Greenspan's last after 18 years as Fed chairman. "The expansion in economic activity appears solid," the Fed stated, adding that higher energy prices and resource utilization "have the potential to add to inflation pressures." But the rest of 2006 is questionable, certainly more so than in 2005 when quarter-point rate increases were seen as a largely mechanical exercise in policymaking. San Francisco Fed President Janet Yellen specified on Dec. 2 that "while it seems unlikely that the end of the current tightening phase is yet at hand, there obviously will come a time when (the phrases 'remove accommodation' and 'at a measured pace') are no longer appropriate." Tuesday's increase keeps rates near the middle of what's thought to be the Fed's neutral range of 3% to 5%, when policy is neither stimulative nor restrictive. But reflecting the uncertainty over whether the Fed will stop at 4.5% or go still higher to 5% and perhaps even beyond, Fed Chairman Alan Greenspan wrote in a Nov. 3 letter to the Joint Economic Committee that "it is impossible to know with any certainty when the neutral rate has been reached." The nominee to replace Greenspan, Ben Bernanke - the White House's chief economist and a former Fed Governor - has already been cleared by the Senate Banking Committee and is expected to be approved by the whole Senate. And the central bank under Bernanke will have competing forces to consider. For one, rate hikes tend to affect activity with a lag, suggesting that the past few rate increases have yet to work their way through the economy. And the Fed's rate-hike campaign in 2000 that pushed the Fed funds rate to 6.5% was criticized in some circles as exacerbating the 2001 recession. The Economic Policy Institute, a liberal think tank in Washington, D.C., complained that the Fed "is hitting the brakes too hard" by crimping wage growth. But some analysts counter that recent sturdy data suggests the Fed could err slightly on the high side as insurance against inflation without doing long-term damage. Despite headwinds form Hurricane Katrina and soaring energy prices, gross domestic product grew at a 4.3% clip in the third quarter, slightly above the 3.5% to 4% range that's considered the economy's noninflationary speed limit. And rate-sensitive sectors like housing remain buoyant. New home sales soared in October by 13% to a record-high annual rate. And durable goods orders, a sign of rate-dependent capital spending, swelled 3.4% that same month. Core inflation, meanwhile, is running at 1.8%, within what Bernanke has described as the 1% to 2% "comfort zone." Speaking in March, when he was still a Fed Governor and the Fed funds rate was 2.5%, Bernanke said that "one may reasonably ask when this process of removing policy accommodation will stop." "The funds rate will have reached an appropriate and sustainable level when, first, the outlook is consistent with the Committee's economic goals and, second, the slope of the term structure of interest rates is approximately normal, as best as can be determined," he stated. Northern Trust Economist Paul Kasriel commented in a research note, "the circumstantial evidence is that a 4.5% Fed funds rate would be neutral, if not restrictive, under one of Bernanke's criteria of Fed funds neutrality."