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Tuesday, August 10, 2004
 
Fed Rises Interest Rates Again
Call it another interest rate increase. The US Federal Reserve stayed on its recently charted course of measured short-term interest rate increases, taking the Federal funds rate up to a still-low 1.5 per cent. In a widely watched statement that acknowledges a slowing in economic growth that has US financial markets in a frenzy, the Fed stuck to its bigger-picture view that the economy is in a recovery and a re-acceleration in the pace of that recovery is coming sometime soon. "The economy nevertheless appears poised to resume a stronger pace of expansion going forward," the Fed said Tuesday in a statement accompanying its interest-rate decision.
The Fed's statement and continued faith in economic growth should provide comfort to those unnerved by the minuscule increase in job creation registered in July and June. The central bank stayed consistent with its theme: any slowdown is essentially a soft patch in a positive story, albeit a slow patch that stretches longer than Fed Chairman Alan Greenspan publicly foresaw in late July. The only thing market participants have to worry about is this: the Fed could be wrong. Right or wrong, today's statement shows the Fed hasn't done a full reversal in its economic outlook. The Fed has to take the long view and a couple of months of weakening economic numbers after a long-awaited employment pickup doesn't come close to registering as the long view. Markets, on the other hand, have to react and overreact. Swinging back and forth on the latest data and extrapolating that data it to its most negative or positive implication is part and parcel of the markets' price discovery mechanism. It's also how traders make or lose money. So it won't be surprising if we hear some calls from the markets that the Fed's still mainly sanguine view of the economy and even employment shows the central bank's increasingly tenuous tie to reality. Two months of a weaker, but still growing, economy is no reason for the Fed to panic. That's especially true given how low interest rates already are and the fact that small increases won't serve as a real drag on economic activity. That's also true since the Fed has spent time and effort to convince the market it has embarked on a measured removal of the monetary accommodation it baked into the economy for so long. Today the FED replaced that line with this: "In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed." Then it added this, "This softness likely owes importantly to the substantial rise in energy prices." For a long while, after oil prices left their perch of $US30 a barrel (considered high at the time), much of the commentary about the increases revolved around how much less impact oil prices had on the broad US economy and non-energy prices. It set one wondering how high oil prices would have to get to have that broader impact. With oil futures near $US45, the Fed acknowledged today that it thinks we have gotten to that point of broader impact.
By The Associated Press
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