Tuesday, August 10, 2004

The carry trade becomes ever so slightly less attractive.
The Federal Reserve raised its target for a key short-term interest rate a quarter-percentage point Tuesday, in a continuing effort to raise lending rates from the lowest levels in more than 40 years.

While acknowledging recent signs of a slowdown in economic growth and the labor market, the central bank repeated the view, stated in recent weeks by its chairman, Alan Greenspan, that the slowdown was temporary.

At the end of a one-day policy meeting, the Fed's policy-makers raised their target for the fed funds rate, an overnight lending rate that influences other rates throughout the economy, to 1.5 percent from 1.25 percent.
Elsewhere in the high-flying Anglosphere, the Bank of England has raised rates 125 basis points since November 2003, which now stand at 4.75%. The Reserve Bank of Australia has raised rates 100 basis points since their most recent low in December 2001; Down Under they stand now at 5.25%. In Canada they're loosening monetary policy (most recently in April) but at 2.0% are still tighter than the Fed.

Those Who Know -- aka OECD economists -- think "neutral" monetary policy for the US is around 4.0%, although with the economy clearly slowing to well below its late 2003 pace, perhaps that estimate will fall. Regardless, the Fed clearly has a long way yet to go. Yet as Peter Hartcher notes in today's Financial Times (sub. only),
The crucial question is whether America's economic recovery can bear the strain of anything even approaching a normal interest rate. . . . America already has pushed all three of its levers of macroeconomic stimulus [ed. -- interest rates, fiscal policy, value of dollar] fairly hard over to the "go" position. Mr Greenspan must be praying that nothing goes awry in the year ahead.


Post a Comment

<< Home