Newspaper article St Louis Post-Dispatch (MO)

Fed Rate Hike Might Just Be Right on Time

Newspaper article St Louis Post-Dispatch (MO)

Fed Rate Hike Might Just Be Right on Time

Article excerpt

Has the Fed got it right this time? After three months of turmoil in financial markets, that's the question uppermost on many investors' minds.

The Federal Reserve Board first began tightening monetary policy in February, saying it wanted to head off inflationary pressures it saw building up. The stock and bond markets fell sharply, with investors suggesting that the Fed had raised the specter of inflation but hadn't done enough to control it.

Last Tuesday, the Fed tightened a couple of notches more, and the markets rallied. Have investors suddenly come to love higher interest rates?

No, but the market always looks forward, not backward.

Frank Aten, who oversees bond investments at Boatmen's Trust Co., recalled that in February, Fed Chairman Alan Greenspan talked about shifting from an easy-money policy to a neutral stance. In monetary-policy lingo, a neutral policy lets the money supply grow just enough to accommodate economic growth, without adding to inflation.

But then Greenspan pushed up rates only a tiny amount, and investors started speculating about how many more increases would follow. They were right: The federal funds rate, which is what banks charge each other on overnight loans, is now 4.25 percent, up from 3.25 percent after the Fed's initial move.

"He should have taken it to neutral right away," Aten said. "The way they were doing it, taking it up in fits and starts, you knew the next move was up."

"I think they're pretty close to neutral now," Aten said. "The next move (in interest rates) is still probably up, but the time period now is a little longer."

While bond investors may be most interested in the direction interest rates will go next month or next year, other Fed-watchers look at broader changes in the way the central bank operates.

Historically, the Fed's record at fine-tuning monetary policy has not been a good one. "The Fed has always been behind the curve" is the assessment of Allan Meltzer, a professor of economics at Carnegie-Mellon University in Pittsburgh.

Usually, it has kept up an accommodative monetary policy - meaning rapid money growth and low interest rates - for too long after the end of a recession. …

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