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.
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%.