FOMC Raises Target Rate 25 bps to 3.75%

As widely expected, the Fed decided today to increase the target federal funds rate 25 basis points to 3.75%. More interesting is the change in the accompanying statement relative to the last meeting. Here are the two statements with the old language in italics below the new. Notably (1) the committee stills sees policy as accommodative and believes output will continue to exhibit robust underlying growth, partly because of the accommodative stance and partly due to growth in productivity. (2) The FOMC sees core inflation as low in recent months and inflationary expectations “contained.” Their view that productivity is strong will help to reduce inflation concerns.  (3) The second part of the statement is identical to the last release. Interestingly, they still see the upside and downside risks as roughly equal and left in place the measured pace statement. The standard qualifier that future policy is data dependent was left in place. Finally, the vote was not unanimous. In a move certain to generate attention and speculation regarding the Fed's next move, Governor Mark Olson dissented in favor of no change in the target federal funds rate.  The overall message is that the majority of the committee does not perceive long-term changes in the economic outlook due to Katrina and, though there is dissent, policy was set accordingly:

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent.

[The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/2 percent.]

 

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.

While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

[The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.]

 

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

[The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.]

 

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Anthony M. Santomero; and Gary H. Stern. Voting against was Mark W. Olson, who preferred no change in the federal funds rate target at this meeting...

[Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern...]

When the minutes are released, it will be interesting to see how much disagreement there was regarding the rate increase during the discussion, particularly since it's traditional for the committee to support the proposal as a group even when there are individual differences regarding policy.  But as it stands, the message is to expect more rate increases in the future unless incoming data change the committee's current economic outlook.

[UPDATE:  William Polley comments here.  David Altig at macroblog weighs in here.  New Economist is here.  Tim Duy's Fed Watch prior to the meeting 9/18, 9/13, 9/5, and 8/30.  Washington Post, NY Times, CNN Money, Bloomberg, WSJ]

UPDATE:  The Washington Post notes evidence in the symbolic vote to raise the discount rate to 4.75% (see the press release) in order to maintain a 1% spread relative to the target federal funds rate that five bank presidents appear to have been willing to let the target rate stand at 3.5%:

Fed board member Mark W. Olson voted against the move, saying he preferred to leave the rate unchanged -- the first dissent on the committee since June 2003. More members came to the meeting open to Olson's position; only seven of the 12 regional Fed banks had requested a similar quarter-percentage point increase in the largely symbolic discount rate to 4.75 percent -- a sign that five banks would have been content with no increase in the funds rate either.

As David Altig at macroblog notes, this needs to be interpreted with caution.

UPDATE:  Macroblog notes further discussion:

The statement parsed, at The Big Picture.  The Capital Spectator sees the possibility of more of the same, and deeper trade deficits as a result.  William Polley thinks "5% by summer is a real possibility."  The Skeptical Speculator does its usual fine job of putting things in an international perspective. The Prudent Investor says the FOMC's press release "the confident and complacent tone of previous statements".  Forex Rate Currency News characterizes the rate increase as "sheer relief".