In a decision designed to quell market fears over future inflation pressures, the Fed's benchmark Federal Funds rate was lifted to 4.25 per cent. The discount rate was raised to 3.5 per cent - the first increase in more than five years. The Fed's action signalled an aggressive assault on future inflation pressures; each of the three previous increases since early February were a quarter percentage point only.
Wall Street stocks surged. The Dow Jones Industrial Average leapt by 49 points to close at 3720. . US Treasury bonds also rallied sharply. The benchmark 30-year US Treasury bond surged more than two full points in heavy trading as the markets endorsed the Fed's decision to tighten monetary policy more sharply than expected and end immediate uncertainty over interest rates.
The surge in bond prices drove down bond yields to 7.28 per cent compared with a yield of more than 7.60 per cent only days ago.
After two sets of better-thanexpected inflation figures last week, market speculation of a big rise in US rates died down. But analysts welcomed the Fed's decision to end the uncertainty over future rate increases. The US central bank said its decisions substantially removed 1993 monetary accommodation, meaning that it had considered the 1993 interest rate level too low to curb future inflation pressures.
The bond market reaction amounted to approval of the Fed's assessment that its decision to raise rates might be the last for a while.
Although rising bond prices are driving long-term interest rates down, some leading US banks yesterday raised borrowing costs for businesses and consumers by lifting their prime lending rates half a point to 7.25 per cent. The rise in prime rates was led by First Chicago Bank, the Bank of New York and Citicorp. Other big US banks were expected to follow suit soon.
But the Fed's action came too late to affect UK markets, although gilts may rally strongly when trading opens today, provided there is no bad news in a clutch of UK economic indicators published today.
The dollar climbed after the decision was announced and was more than one pfennig above its lows for the day at DM1.6730. The Fed decision followed a half-point cut in key rates by the Bundesbank last week and may raise suspicions that the two central banks co- operated on the timing of their announcements to help the dollar. Despite an international operation to support the dollar two weeks ago, the US currency has failed to rally significantly.Reuse content