The Economy: US rates up, but dovish statement boosts markets

Henry Thornton writes: As was widely expected, the US Fed hiked interest rates by 25 basis points from 5% to 5.25% overnight, making it the 17th consecutive rate rise since the Fed initiated the tightening policy in June 2004. US interest rates are now at their highest since March 2001. Although the Fed followed expectations […]

Crikey

Jun 30, 2006

Henry
Thornton writes:

As was widely
expected, the US Fed hiked interest rates by 25 basis points from 5% to 5.25%
overnight, making it the 17th consecutive rate rise since the Fed initiated the
tightening policy in June 2004. US interest rates are now at their highest
since March 2001.

Although the Fed
followed expectations in raising rates, the accompanying
FOMC statement
did not include the hawkish language many were
expecting.

The statement
suggested that recent core inflation readings “have been elevated in recent
months” and that despite recent productivity gains that have kept unit labour
costs down, the “high levels of resource utilisation and of the prices of energy
and other commodities have the potential to sustain inflation
pressures”.

But what was
significant about the statement, and what sent the markets upward, was the lack
of hawkish, anti-inflation rhetoric that many feared. The Fed said that the
“extent and timing of any additional firming” in monetary policy will be
determined by “incoming information”; meaning that the whiff of a pause is again
in the air.

New
York’s
Dow Jones consequently surged 217.24 points, or 2%, to 11,190.8, including a 100
point jump within five minutes of the release of the statement. S&P’s
500-stock index climbed 26.87 points, or 2.2%, to 1,272.87, and the
Nasdaq jumped 62.54 points, or 3%, to
2,174.38.

The Reserve Bank
of Australia meets on Tuesday and,
although many are expecting more fence-sitting for the time being, continuing
strong economic data is likely to force another rate rise before the end of the
year.

The Roy Morgan Unemployment
estimate,
released today, shows unemployment fell 1.4% to 6.6% in the June quarter. The
Roy Morgan Unemployment estimate, as well as the recent official ABS
unemployment figure of 4.9%, raises concern for spiralling labour costs and
ensuing inflation. Although monetary policy is dependent upon inflation figures
to be released in July, such strong labour figures have placed Henry tentatively
in the once-more-in-2006 crowd.