special reports

Fed Raises Rates to 4.75%, Hawkish Comments Signal 2 More Rate Hikes

Tuesday, 28 March 2006 14:35:26 GMT  |  Kathy Lien, Chief Strategist

The US Federal Reserve raised interest rates for the fifteenth time by a quarter of a point today to 4.75 percent, the highest level in 5 years.  The FOMC statement was much more bullish than the market was expecting.  With Fed Fund futures originally showing only a small minority favoring 5.25 percent rates, the positive outlook on growth and concerns for rising inflation pressures has 5.25 percent the more likely top. The US Federal Reserve raised interest rates for the fifteenth time by a quarter of a point today to 4.75 percent, the highest level in 5 years.  The FOMC statement was much more bullish than the market was expecting.  With Fed Fund futures originally showing only a small minority favoring 5.25 percent rates, the positive outlook on growth and concerns for rising inflation pressures has 5.25 percent the more likely top.  Newly installed Fed Chairman Ben Bernanke made his mark at today's meeting by changing the entire middle paragraph, or the meat of the statement.  The committee now believes that the weaker numbers that we saw in the fourth quarter of last year were due to temporary or special factors.  We will be fascinated to hear what these "special factors" are since most of the talk of the slowdown was due to higher interest rates crimping the housing market.  The Fed sees current growth as strong but expect it to moderate to a more sustainable pace.  However in contrast to Greenspan's more concise comments on inflation, in true Bernanke style, the updated comments on inflation were far more clearer.  The Fed said that even though the "run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."

Bottomline:  The dollar is rallying on the more hawkish nature of the comments.  Two more rate hikes seem to be the most likely scenario now, however with a great deal of economic data still due for release this week and five central bankers scheduled to speak, we expect a lot more volatility in the days to come.  A vertical rally in the dollar here on forward is far from certain.

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