Forex Blog: Currency Trading News & Analysis.

March 14th 2005

Fed moves to raise interest rates

When the Federal Reserve meets in 2 weeks, it will in all likelihood raise interest rates by 25 basis points (.25%). Investors will be focusing less on the actions of the Fed, and more on the words behind those actions. Alan Greenspan has acknowledged on previous occasions that interest rates are currently ‘accommodative,’ meaning they are too low. As a result, the Fed will continue to raise interest rates at a ‘measured’ pace until they reach a neutral level, and neither accelerates nor inhibits economic growth. The clarity with which Greenspan has explained the Fed’s current monetary policy has given investors a great deal of confidence in predicting future interest rate movements. As a result, the risk premiums which are usually tacked onto interest rates to account for interest rate uncertainty are pitifully low. Many investors think Greenspan will reverse course and try to infuse a healthy amount of vagueness into American monetary policy, so as to raise risk premiums. The Wall Street Journal reports:

[Greenspan] implied the markets may underestimate the extent of Fed rate increases to come, by calling the low level of bond yields a "conundrum." Partly in response, Treasury bond yields have since shot up to almost 4.5% from 4.1%, riskier corporate and emerging-market bond yields have risen even more, and volatility has increased.

Read More: Will Fed Continue to Describe Its Rate Boosts as ‘Measured’?

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Posted by Adam Kritzer | in Central Banks | No Comments »

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