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For the 13th consecutive time, Greenspan's Fed raised interest rates by a quarter of a percentage point today, hiking the so-called federal funds rate—a key short-term interest rate—to 4.25 percent.
Wall Street had been anticipating this move for weeks. The real question leading into this afternoon's meeting was: Is this going to be the Fed's last rate hike in the Greenspan era, which comes to an end on January 31 when he is due to retire?
Heading into this meeting, conventional wisdom said that if this wasn't the Fed's last rate hike, it would be the second to last—with the last move expected to come at the end of January, just before Greenspan's successor, Ben Bernanke, takes office.
But Greenspan seems to have thrown a wrench into this theory. In explaining its decision today, the Fed said in no uncertain terms that "some further measured policy firming is likely to be needed" to keep inflation in check.
Wall Street's immediate reaction was positive, as investors interpreted the statement as confirmation that this round of interest rate hikes is at least nearing an end. The Dow Jones industrial average, for instance, jumped around 85 points in late afternoon trading.
But before investors get too far ahead of themselves, they might re-examine what the Fed actually said. Its exact words, again, were that "some further measured policy firming is likely to be needed . . . ." Translation: More rate hikes—that's hikes plural—are going to be needed to keep inflation in check. In other words, Greenspan will not be able to finish the Fed's war on inflation before he leaves office.
Since Greenspan has only one more monetary-policy meeting left in his tenure—on January 31—he is in essence telegraphing the need for his successor to continue the fight by raising rates immediately upon entering office. This goes counter to recent arguments on Wall Street that Bernanke would not have to raise rates upon assuming the Fed chairmanship because Greenspan would have done the work for him.
Bottom line: On Wednesday, don't be surprised if stocks reverse course and give back some of Tuesday's gains—once investors realize what Greenspan actually said.
Biz Buzz wraps up the day's market news and offers an agenda of upcoming economic news.
