Surprising almost nobody, the
announced a 25-basis-point hike in the key short-term lending rate, raising its target for the fed funds rate to 5.25% from 5%.
Just about every economist on the Street had predicted the move following the release of the July
, which revealed further tightness in the labor markets, one of the Fed's chief concerns. This is the second rate hike of the year, following
June 30's 25-basis-point increase, and in the weeks leading up to this meeting it was all but a foregone conclusion.
Federal Open Market Committee
said in its
statement announcing the move that it has adopted a neutral directive, which indicates it has no predilection toward raising or lowering rates in the weeks leading up to the Fed's next meeting, Oct. 5. The Fed acted similarly in June, which surprised the markets.
It had been the Fed's practice to return to neutral following a change in interest rates, but prior to this year, the Fed did not announce decisions on its bias. So in the first test of the new open policy, the markets took the adoption of a neutral bias to mean the Fed was possibly done hiking rates despite the harsh language contained in the Fed's statement, and both stocks and bonds rallied sharply. Now that the market knows its history, a similar euphoric reaction isn't expected.
The Fed also raised the discount rate to 4.75% from 4.5%. A move in the discount rate is mostly symbolic, but the Fed prefers to maintain a difference of 25 or 50 basis points between the discount and fed funds rates. Raising the discount rate, however, also signals the Fed may not be done hiking rates in the coming months.
The fed funds rate is the rate banks charge one another for overnight loans. The Fed keeps it in line with its target through open market operations -- buying and selling government securities so the money supply matches demand at that level. The discount rate is the rate the Fed charges member banks to borrow from its discount window.