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Market CommentariesThe Federal Reserve Raises Interest Rates For The Second Time In Three Meetings


The nation's Federal Reserve Board, which may not always do what investors want, at least rarely surprises them these days. In fact, few groups are as transparent as the Fed. Thus, when the lead bank earlier this afternoon opted to boost the federal funds rate by a quarter of a percentage point, there were few raised eyebrows. Of note, this move had been widely telegraphed in recent weeks, with the odds of an increase in borrowing costs being close to 100% in the days leading up to the Fed meeting.

Behind this move, the second in three months and the third over the life of this now lengthening business expansion, was a sense that we were enjoying a steadily improving economic outlook, especially in the labor market arena. Last Friday's jump in non-farm payrolls of 235,000 clearly clinched the deal for higher rates, as the increase in jobs was a full 50,000 above expectations. Also of note, inflation has ticked up recently, and we continue to see resilience in the industrial and consumer markets.

Likewise on the Fed's mind, in addition to the better employment numbers and the modest uptick in inflation recently, have been the continuing increases in household spending and the firming in business fixed investment. Also, as noted, inflation has ticked up, moving close to the central bank's often-stated longer-run objective of 2%. However, although the Fed chose to raise rates, its monetary policy remains accommodative.

Also of import, the bank intoned that near-term risks to the economic outlook are roughly balanced. The accommodative stance still in place is being kept there, according to the Fed, in order keep the current improvement in place. The Fed also suggested that it would likely continue to raise interest rates in the coming months. That intention, too, had been widely telegraphed in recent weeks. So, there were no surprises of note in the accompanying monetary statement.    

The stock market obviously liked the Fed action, at least for the moment, as equities, already up in earlier trading today, rallied further on this expected move, which was affirmed by all but one Fed board member. That lone discordant note was sounded by an official who would have preferred to keep rates level at this time.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.

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