Fed raises interest rates

Today, Alan Greenspan and the Federal Reserve raised the federal funds rate from 2.5% to 2.75%. Most analysts have been predicting this change for over a month, which may explain the USD's recent rally. The Federal reserve has been remarkably transparent in its monetary policy, which has depressed risk premiums on interest rates. The Fed abandoned its use of 'measured' in characterizing the pace of future interest rate movements, and intimated that it would likely raise rates by 25 basis points at each of its next two meetings. Investors unanimously agree that the Fed will continue to raise rates, but the pace is somewhat unpredictable. The Fed noted that the weak dollar is driving up the costs of imports and raw materials. This phenomenon, combined with the effects of broad economic growth, may lead to inflation, in which case the Fed would likely accelerate the rise in interest rates. The Wall Street Journal Reports:

Fed officials believe the U.S. has been at "price stability" -- a zone where inflation, at about 1.5% by their preferred measure, doesn't figure significantly in companies' or households' decisions.

Read More: Fed lifts rates, warns on inflation