Fed Raises Short-Term Rates a Half Percentage Point, as Expected

Throwing its effort to slow the pace of economic growth into high gear, the Fed decided today to raise the fed funds rate by an aggressive half percentage point, to 6.5% from 6%. Almost every Wall Street forecaster expected the move.

It was the sixth hike in the key short-term lending rate since June, but the first 50-basis-point hike since February 1995. Each of the five previous hikes lifted the funds rate by 25 basis points. Most forecasters started calling for a 50-basis-point hike at today's meeting after the first-quarter Employment Cost Index and GDP report detected higher levels of inflation.

What Rate Hikes Have Wrought Changes in major market indicators since the Fed started hiking
Instrument	6/29/99	5/15/00	Change	Percent Change*
DJIA	10,791.29	10807.78	+16.49	+0.2%
S&P 500	1351.45	1452.36	+100.91	+7.5
Nasdaq	2642.11	3607.65	+965.54	+36.5
Wilshire 5000	12,584.00	13437.65	+853.65	+6.8
Currency and Commodities
Dollar Index	117.89	120.59	+2.70	+2.3
CRB Index	189.37	219.98	+30.61	+16.2
Oil	18.56	29.95	+11.39	+61.4
Gold	260.50	275.90	+15.40	+5.9
Treasury Yields
2-Year Note	5.680%	6.745%	+1.065	+2.7
5-Year Note	5.820	6.707	+0.887	+1.2
10-Year Note	5.930	6.450	+0.520	+0.4
30-Year Bond	6.070	6.155	+0.085	+0.9
*For Treasury securities, percent change represents total return. Source: Reuters, Federal Reserve (dollar index), Merrill Lynch (Treasury total returns)

In its statement announcing the policy change, the Federal Open Market Committee said:

Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance.

The fed funds rate now stands at its highest level since 1991. When this tightening cycle started, it stood at 4.75%.

In addition, the FOMC said in its statement that it believes the economy remains at risk of higher inflation. This, too, was expected, and suggests that more rate hikes will follow, perhaps as soon as the FOMC's next meeting, June 27-28.

The Fed also boosted the discount rate by 50 basis points, lifting it to 6% from 5.5%.