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Greenspan's Honorable Exit

His parting jab at inflation will serve the market well in the long term.

Investors hoping for a parting gift from Alan Greenspan will be disappointed with the statement accompanying his last

Federal Open Market Committee

meeting.

While bumping up official interest rates by a quarter-point, policymakers left the door wide open for another hike in March.

The main differences between the two most recent FOMC statements are bolded below:

December:

The Committee judges that some further

measured

policy firming

is likely to be

needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Today:

The Committee judges that some further policy firming

may be

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needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

The removal of "measured" merely slows the tempo; there is no indication of an end to hikes apparent in today's statement. Some will be disappointed in this, as they expected a clearer indication of an end to hikes. Nevertheless, the continued vigilance on inflation is probably best for the markets in the long run, so the knee-jerk response may not go far. In other words, had the Fed indicated that it was finished with its rate hikes, any immediate rally would likely have reversed, owing to an eventual rise in inflation expectations that would be apparent in gold, the dollar, etc.

The Fed characterized the expansion as "solid," the same description as was given in December. In fact, most of the second paragraph describing the economy and inflation risks was verbatim relative to the December statement, with the exception being the short-run influences affecting the economy at each respective meeting:

December:

Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

Today:

Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

This statement is as expected and should therefore cause little disruption to recent market trends. That said, as I have noted many times in recent months, Treasuries rarely trade below the fed-funds rate (only five times in 16 years and only when a rate cut was imminent -- no longer than six months away). That is one of the main reasons why Treasury yields have catapulted higher of late. So if the funds rate is raised to 4.75% in March, expect most Treasuries to hover around that level by the March 28 meeting.

Rate hike odds initially fell below 80% for 25 basis points at the March meeting. They now stand at the high of the day at 84%.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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