The Federal Reserve, the U.S. central bank, Tuesday raised short-term interest rates for the eighth time since June, to three percent. The move is intended to combat the inflationary pressure triggered by higher oil prices.
The overnight fed funds rate has now risen two percentage points since the Federal Reserve began to remove the monetary stimulus that had pulled the economy out of recession four years ago. The increase had been expected. Market participants recently have been more interested in how much further rates will rise before the independent central bank ends this phase of monetary tightening.
Short-term rates are sometimes compared to an accelerator on a car. Rising rates slow economic activity while declining rates speed it up.
Robert McTeer, a former Federal Reserve governor now an official at Texas A&M University, believes this period of tightening of monetary policy by the head of the Federal Reserve, Alan Greenspan, is nearly over.
"Alan Greenspan is very aware that the Fed often takes one step too many. And I think because he is so aware of that it is more likely that the Fed will stop raising rates sooner than people expect," he said.
Another Fed watcher, bond trader Bill Gross in San Francisco, agrees that the U.S. economy is particularly sensitive to interest rates. He believes that because the U.S. and world economies are slowing down, the Fed will probably complete its tightening cycle next month.
"This is a highly levered economy,” he said. “This is a highly levered global economy and very sensitive to the short rate. And to the extent that they [the Fed] overdo it, by a quarter, by a half, by a percent-who knows-then, things can happen."
Other Fed watchers say the next interest rate move will be even more closely linked to impending reports measuring the economy's strength or weakness. Growth has recently slowed to a three percent pace while inflation has increased.