As widely expected, yesterday the Federal Open Market Committee raised its target for the federal funds rate by 25 basis points to 1.75 percent. Excerpt from its press release:
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly. Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
In a report released earlier yesterday, the Organisation for Economic Cooperation and Development (OECD) cut its 2004 forecast for US economic growth to 4.3 percent but raised its growth predictions for the euro zone and for Japan. The latest forecasts for the major OECD economies are as follows:
Despite the upgrades, Europe -- especially Germany -- remains a laggard. If consumer and business spending fails to hold up in the US over the coming months, there would not be too many obvious alternative sources of growth for the world economy.