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The Federal Reserve Shrugs Off Katrina
By
Deputy Editor
John Stepek
May 26, 2006
The Federal Reserve has raised the key US interest rate for the eleventh session in a row, taking it to 3.75%, a 0.25% hike. The rate is now at its highest level since August 2001.
The Fed “acknowledged the economic dislocation” caused by Hurricane Katrina, but rejected calls “for a ‘compassionate pause’”, said the FT. The bank’s key worry was longer-term inflation rather than short-term growth impacts, saying that before Katrina struck, “the US economy had been growing well”.
But one of the ten-member committee dissented – Governor Mark Olson, who wanted to hold rates. While dissent is by no means unusual in the UK’s equivalent meetings at the Bank of England, it’s the first disagreement on the US vote since June 2003.
One economist quoted on CBS MarketWatch even went so far as to say that Federal Chairman Alan Greenspan “might be suffering from ‘lameduck-itis’, less able to sway a majority” as his term approaches its end in January 2006.
However, most analysts believed the accompanying statement from the Federal Open Market Committee “indicated that the central bank” will not stop its rate hikes this year. The committee said that rates remain “accommodative” and could be raised at a “measured” pace.
This “dismayed” markets, which had been expecting the interest rate to be no higher than 4% by the end of January, said The Times. Markets are now pricing in a rate of 4.25% by that point
Published in Economics
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