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Fed Moves to a Bias Toward Tightening

The FOMC left short-term interest rates alone but indicated that it's leaning toward boosting rates in the future.


Federal Open Market Committee

did not raise interest rates but instead adopted a bias that indicates the committee is considering tightening interest rates in the future. The

Federal Reserve

policy panel left the short term lending rate unchanged at 4.75% and kept the discount rate at 4.50%.

FOMC members apparently believe there are enough signs of inflation pressures to justify the change in directive. While wage and price-related pressures have not increased steadily, last Friday's April

Consumer Price Index

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rose at its fastest rate in nine years, and anecdotal evidence in manufacturing surveys is pointing toward recovery in that sector.

In a

statement, the FOMC said: "While the FOMC did not take action today to alter the stance of monetary policy, the committee was concerned about the potential for a buildup of inflationary imbalances that could undermine the favorable performance of the economy and therefore adopted a directive that is tilted toward the possibility of a firming in the stance of monetary policy."

Yields on Treasury maturities have risen sharply in the past few weeks as participants became increasingly concerned over rising inflation. Strategists said the shift in bias has the effect of making the Fed appear vigilant without actually having to change monetary policy. The funds rate has been 4.75% since November, when the Fed cut rates for the third time in seven weeks.

The fed funds rate is the overnight interbank lending rate. The discount rate is the rate for loans from the Fed to banks.

The FOMC will convene its fourth meeting of 1999 on June 29 to again decide whether to change rates.

A Half-Decade of Calibration
Fed funds rate vs. 30-year Treasury bond over five years