The Federal Reserve raised interest rates for a 13th consecutive time Tuesday, but hinted through a crucial change in phrasing that its 18-month tightening cycle may be nearing an end.
With the latest quarter-percentage-point hike, short-term interest rates have climbed to 4.25 percent, their highest level since the spring of 2001.
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By altering the wording in its economic comments, “The Fed is signaling that while there may be future rate hike(s), the end hopefully is near,” said economist Joel Naroff of Naroff Economic Advisors.
But Naroff, along with other experts, was quick to emphasize that Fed Chairman Alan Greenspan remains leery of a possible jump in inflationary pressures.
“Inflation remains job one, and the job is not yet done,” Naroff said.
“Don’t bet the farm on the end of rate hikes,” cautioned economist Richard Yamarone of Argus Research.
Wall Street already had factored in the widely anticipated increase. Investors scrutinized the wording of the central bank’s latest statement, however, seeking clues to future rate-policy trends.
What they found in the commentary was upbeat enough to send U.S. stock prices solidly higher as soon as the statement was released.
“Investors were encouraged” by the language change, one analyst told Dow Jones News Service, “and you got a little bit of a pop out of that.”
The Dow Jones industrial average rose 55.95 points Tuesday, to close at 10823.72
The Fed uses interest rates as a way to keep the nation’s economy from either overheating or slipping into a recessionary downward spiral. By lowering rates, or taking an “accommodative” stance, it can make borrowing costs cheap and revive a flagging economy; if inflation threatens, it raises rates to establish a “restrictive” environment until the economy cools.
In the early days of 2001, the Fed began to lower interest rates, after growing concerned about the weakening economy. Following the 9/11 attacks of September 2001, amid widespread concerns that consumer fears might send the sagging economy into a deep recession, the Greenspan Fed lowered short-term rates to a hyper-stimulative 1 percent, the lowest level in 40 years.
As the economy foundered, Greenspan kept rates low. But by mid-2004, the Fed began raising rates, a quarter-point every six weeks. Every time it has raised rates since then, the Fed has said it thinks its interest-rate policy is accommodative and suggested that rates will continue to rise until they reach a “neutral” level, neither stimulating nor dampening the economy.
On Tuesday, the Fed dropped the long-standing reference to accommodation. Most observers interpreted that change as suggesting rates are at, or very near, what the Fed considers a neutral level.
Economic activity “appears solid,” the Fed statement said. But it also said further rate hikes likely will be needed. That’s because, the statement said, there’s still a threat of inflation due to higher energy costs and “increases in resource utilization,” which observers generally considered a reference to declining unemployment rates.
Although opinions differ, many observers expect the Fed will raise rates three more times, to 5 percent, and be done in May.
But the Fed’s new language makes one thing clear, suggested High Frequency Economics economist Ian Shepherdson: After rates plateau in coming months, if unemployment continues to decline, then “rates will have to move higher.”
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