The Federal Reserve raised interest rates again today. The Fed funds rate inched higher by 25 basis points to 3.0%, only just below inflation’s pace, measured by the consumer price index, which advanced by 3.1% for the year through March. Twelve months previous, CPI was rising by 1.7% and the Fed funds rate was 1.0%. In short, the real (inflation-adjusted) Fed funds rate is close to being neutral, as opposed to negative, for the first time since 2002.

The catalyst for this hawkish monetary bias? Inflation is on the rise. We know because the Fed tells us so. “Pressures on inflation have picked up in recent months and pricing power is more evident,” the Federal Open Market Committee announced today after raising the price of money.
Whether that inflation will be “contained,” as the Fed expects, is at the center of the great debate. In particular, have Greenspan and company nipped the beast in the bud? Or is the creeping threat still creeping?
The bond market isn’t quite sure how to answer if today’s any indication. The yield on the benchmark 10-year Treasury closed virtually unchanged on the day, ending the session at around 4.20%. What happened to the supreme self-confidence of the fixed-income set?
The stock market, by contrast, was downright giddy, at least for a time. The S&P 500 at one point soon after the Fed announcement jumped three-quarters of a percentage point in the space of about 20 minutes. Alas, it was all light and heat. By the end of trading in New York, the S&P ended virtually unchanged, slipping by less than one-tenth of a percent.
Indecision may actually be a prudent stance for the moment. Although the Fed is showing determination when it comes to fighting current and future inflationary threats, maintaining that stance promises to get tougher to rationalize if momentum slows in the economy. With Greenspan’s tenure set to end in January, the maestro is surely asking himself how he wants to go out? There are two basic choices. He can go out as the man who kept waging a war to contain inflation. Alternatively, he can keep the economy bubbling. Ah, but can he do both? Or does one fatally compromise progress on the other?
We may soon find out. Slowing momentum is just what the first quarter GDP report suggests by way of a real annualized advance of 3.1% during January through March vs. 3.9% in the previous quarter. Therein lies Greenspan’s dilemma, namely, should he adjust interest rates going forward to address the first-quarter slowdown or instead stay focused on the uptick in consumer prices? For the moment, he seems to be choosing the latter.
That may prove to be the superior choice if one considers today’s release of new orders for manufactured goods in March. Indeed, economists were forecasting a drop of 1.2% in factory orders, according to the Instead, the orders advanced by 0.1%. Does that imply that first-quarter slowdown will be temporary?
Not necessarily. Although new orders generally inched higher, new orders for durable goods industries dropped sharply by 2.3% in March. If durable goods are indeed a bellwether for measuring the vigor of the economy, it’s hard to dismiss the fact that this data series has been showing weakness for several months running.
The weakness in durables goods raises questions about second quarter GDP, says the chief economist for MFR Inc. via AFX. “This suggests that capital spending growth in the second quarter will be soft, lending support to the belief that second quarter real GDP growth is going to be on the weak side,” opines Joshua Shapiro.
But there are many ways to slice the data ham. Optimists are inclined to note that new manufacturing orders excluding the transportation sector jumped 1.3% in March, the biggest monthly increase in a year.
No matter which bias you prefer, there’s one statistic in today’s factory orders numbers that sticks out like an oil derrick on Wall Street. In a sign of the times, orders for petroleum and coal products exploded skyward in March by 18%, which translates into a $5.6 billion rise—the largest on record, Bloomberg News reports.