Thursday, June 29, 2006

Ding-Dong The Inflation Witch Is (Mostly) Dead

For the first time in quite a while, the Fed has hinted that the continual interest rate hikes might be coming to an end. This prompted the market to strongly rally after the Fed's announcement.

This news trumps Ixtapa. OK, OK... I will write about our trip in the next couple of days (with photos!).

For those interested, below is the verbatim text from the Fed announcement.

Verbatim Fed Text

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

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