The U.S. central bank, the Federal Reserve, Wednesday as expected raised short-term interest rates by one quarter of one percent, the first such rise in over four years. The overnight fed funds rate remains at a very low 1.25 percent.
The increase was widely anticipated and financial markets were well prepared. In its statement the Federal Reserve said the economy is growing at an acceptable pace and will probably continue to do so. The risk of higher inflation, it says, is balanced by the possibility that growth could slow in the months ahead. Monetary analysts like former Federal Reserve board member Alan Blinder says the statement suggests that future rate increases will be small or measured in both size and frequency.
"There were two questions really coming into this statement. Will they drop the measured language? They didn't," he said. "And would they go asymmetric on inflation, showing more concern with inflation going up instead of down? They didn't."
Mr. Blinder, a professor at Princeton University, says the Fed action is exactly what the markets had anticipated.
Bill Gross, one of the biggest bond traders in the United States, says he expects there will be several more small rate increases over the next few months.
"It's fair to say that the bond market has already anticipated at least 150 basis points [1.5 percent] to maybe 200 basis points [two percent] of Fed tightening [of monetary policy]. And to the extent that the Fed stops around three percent, whether it is 12 or 18 months down the road, then bond traders have fairly anticipated that event," he said.
In the months that followed the terrorist attacks in September 2001, the Federal Reserve aggressively cut interest rates in an attempt to stimulate a weak economy. The Fed Funds rate was reduced 11 times from its early 2001 level of six percent. The markets anticipate a series of 0.25 point increases over the months ahead. The U.S. economy is expanding at about a four-percent rate and inflation is below two percent.
Rate increases in the United States generally mean interest rates will rise in other countries, especially in those whose currencies are held steady against the dollar.