Fed Leaves Rates Unchanged but Switches to Tightening Bias

The Fed kept the fed funds rate steady at 5.25% but changed its policy directive to favor higher rates in the future.
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voted today to leave interest rates unchanged but switched its so-called policy directive to tightening from neutral, suggesting that it may hike rates at its next meeting on Nov. 16.

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Federal Open Market Committee

, in its

statement announcing the decision, noted that the tightening bias does not guarantee a hike in November:

The Committee adopted a directive that was biased toward a possible firming of policy going forward. Committee members emphasized that such a directive did not signify a commitment to near-term action. The Committee will need to evaluate additional information on the balance of aggregate supply and demand and conditions in financial markets.

Despite its August admonition that "the degree of monetary ease required to address the global financial market turmoil of last fall is no longer consistent with sustained, noninflationary, economic expansion," the Fed apparently concluded that the two 25-basis-point rate hikes it delivered this summer are enough for now. Last fall, the Fed cut rates by 25 basis points three times.

The decision to leave the fed funds rate at 5.25% was widely expected. A


survey of the 30 primary dealers of Treasury securities found that all but one were predicting no change. (

HSBC Securities

predicted a hike to 5.50%.)

The decision to go to a tightening bias was more controversial. In the


poll, 17 primary dealers predicted that the Fed's monetary policy committee would maintain a neutral bias, while 13 expected the committee to go to a tightening bias.

The FOMC, which held its sixth of eight scheduled meetings for the year in Washington, is not expected to raise rates at its final meeting of the year on Dec. 21 because of the potential for economic and financial disruptions related to the millennium date change. But the tightening bias suggests the Fed will hike rates at its penultimate meeting on Nov. 16 if the economic data released between now and then show fast-clip growth and accelerating inflation.

The committee also left the less important discount rate unchanged at 4.75%. The fed funds rate is the Fed's target for the overnight rate at which banks lend to each other, while the discount rate is the rate at which banks can borrow from the Fed.