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The nation's central bank voted today to raise a key short-term interest rate for the 15th consecutive time. This brings the federal funds rate, which banks charge one another on overnight loans, up to 4.75 percent. It also marks the first key decision of the Fed under Chairman Ben Bernanke.
Bernanke, who replaced Alan Greenspan in February, was widely expected to lift rates at this meeting. At the very least, Bernanke needed to prove to Wall Street that he is as much of an inflation fighter as were his two immediate predecessors, Greenspan and Paul Volcker.
But Bernanke seemed to go out of his way to demonstrate that he intends to make this as seamless a transition as possible.
In the Fed's statement explaining its decision, Bernanke adopted much of the same language that Greenspan used to explain his policy for the past several months. That statement indicated that the central bank believes "some further policy firming may be needed" to maintain the right balance between economic growth and inflation fighting.
Translation: The Fed will probably need to raise rates even higher in the next several months to keep inflation in check. Many, in fact, believe the Fed will raise rates two more times, bringing the fed funds rate to 5.25 percent.
The one wild card in this scenario is the bond market. Last year, the bond market kept long-term interest rates low despite Greenspan's efforts to lift short-term rates higher.
But in recent weeks, the bond market has sold long-term treasuries, lifting yields on 10-year treasury notes up to around 4.75 percent. If long-term-bond yields continue to rise, that may, in effect, accomplish what the Fed intended all along: to slow the economy to the point where inflation is no longer a concern.
Perhaps this may explain why the stock market reacted so negatively to Bernanke's decision.
The Dow Jones industrial average fell more than 75 points immediately after the rate hike, as some investors felt that Bernanke could have done more to signal that this series of rate hikes is nearing an end in light of higher long-term-bond yields.
