By James Langton
(May 16 – 14:25 ET) – The U.S. Federal Reserve Board raised interest rates 50 basis points to 6.50% as expected this afternoon. Most analysts expect the Bank of Canada to follow suit tomorrow morning.
The Fed raised both the federal funds rate and the discount rate by 50 bps. It justified the increase by saying, “Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy’s outstanding performance.”
It also indicated that it isn’t necessarily finished hiking rates either. “Against the background of its long-term goals of price stability and sustainable economic growth and of the information already available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.”
As the decision neared the consensus expectation for a 50 bps move wavered a little, with some calling for just a 25 bps move. But ultimately the market was right. Some of today’s rally sold off, but since traders weren’t surprised by the move, the reaction hasn’t been brutal.