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Economy in Brief

FOMC Raised Funds Rate for Third Time
by Tom Moeller September 21, 2004

The Federal Open Market Committee raised the target rate for federal funds by 25 basis points to 1.75%, as expected. The discount rate also was raised 25 basis points to 2.75%.

The decision was unanimous.

Today's press release from the Fed again contained comments suggesting that rates could be raised again. "The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity." These comments are identical to the Fed's last.

The Fed's statement noted that the economy "appears to have regained some traction" after moderating in reaction to higher energy prices.

For the complete text of the Fed's latest press release please click here.

Today's action by the FOMC seems more to address market inflationary expectations rather than economic growth or inflation directly. As the accompanying chart indicates, price inflation during the last twenty years has not been very responsive to whether the US economy was operating above or below its potential.

The role of money in determining inflation is discussed here by the Federal Reserve Bank of Richmond in a report titled "How Do Central Banks Control Inflation?."

"1994", a commentary on past FOMC action from the Federal Reserve Bank of St. Louis is available here.

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