The Federal Reserve today raised its federal funds rate by 25 basis points, to 4.25%, and indicated that while further increases are likely, its 1%BD;-year run of tightening is coming to an end.
"Common sense would say we're a lot closer to the end (of tightening) than we were three months ago or six months ago," said Bruce Harley, senior manager of U.S. government derivatives at INVESCO Fixed Income, adding that Fed officials "have maintained maximum flexibility" to continue to increase rates if they think that is necessary to keep inflation at bay.
Philip Barach, managing director and fixed-income portfolio manager at TCW, said the Fed has clearly telegraphed that it expects to push its Fed funds target to 4.5% before possibly easing up on the tightening.
In fact, Mr. Harley said futures markets are already pricing in a further 25 basis-point increase at the next policy-setting Federal Open Market Committee meeting, scheduled for Jan. 31, the day before Chairman Alan Greenspan retires. He is slated to be replaced by Ben Bernanke, pending final approval by the Senate.
The Fed's official statement today said despite higher energy prices and hurricane-related disruptions, the economy "appears solid," and core inflation, which excludes food and energy, has remained "relatively" low in recent months, with longer-term expectations in check.
"Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures," Fed officials said in the statement.
