Take for instance the Fed’s decision to raise the target for the fed fund rate by 0.25% at its Tuesday (09/21/04) meeting. The rate is now 1.75%.
The meeting of the Open Market Committee was no surprise – the Fed had it scheduled for over a year.
The decision to raise the target for the key interest rate was no surprise – virtually everyone on Wall Street expected it.
The statement released by the committee contained no new revelations.
In summary, exactly nothing unexpected happened at 2:15 p.m. EDT when the Fed released the statement.
So what happened? The bond and stock markets rallied.
Looking around the Web, I found some observations about the rally. Most observations centered on the notion that the market was glad to get past a potential (however unlikely) piece of bad news that the Fed might bump rates 0.50% or make some cautionary statement about the future.
You might also find some who read a very subtle, but more encouraging statement about the condition of the economy into the Fed’s statement.
With real interest rates remaining at historic lows, the economy can stand some further interest rate increases before they become inflationary, at least that’s how the Fed sees it.
Interest-sensitive stocks such as housing, autos and others bear watching as these interest rate hikes start rippling down to consumers.
In the meantime, the Fed will undoubtedly raise the target for the fed funds rate again before the end of the year. The next meeting of the Federal Open Market Committee is Nov. 10, after the presidential election.
