Fed raises rate to 3.5 percent

The Federal Reserve raised interest rates again yesterday by another 25 basis points. The target federal funds rate is now at 3.5 percent. In its statement, the FOMC said that "policy accommodation can be removed at a pace that is likely to be measured".

In other words, more of the same to come.

Quite a bit more, in fact, thinks the New Economist, pointing to the statement -- "Aggregate spending, despite high energy prices, appears to have strengthened" -- to suggest that "rates will have reached at least 4.0% by year-end, and should peak next year at around 4½%".

David Altig, on the other hand, considered the FOMC statement to be "ho-hum". He did, however, consider the productivity and costs report for the second quarter -- showing non-farm business productivity growth falling to 2.2 percent from 3.2 percent in the first quarter and unit labour costs growing at an annual rate of 1.3 percent, well below the first quarter's revised 3.6 percent rise -- to be "fairly positive news".

Reuters reports the news on the Fed rate hike and productivity growth, as well as other economic news.

Separately, the Commerce Department said inventories at U.S. wholesalers rose 0.7 percent in June, while sales increased 0.6 percent. The inventories-to-sales ratio stayed at a lean 1.19 months' worth... Investor's Business Daily and TechnoMetrica Market Intelligence said their economic optimism index rose to 50.9 in August from July's 48.6, suggesting consumers had grown optimistic after being in the below-50 pessimism camp... The International Council of Shopping Centers and UBS said sales at U.S. chain stores fell 0.8 percent last week, after a 0.9 percent gain in the previous week.

If the robust economy is not translating into substantially higher labour cost, much of the benefits must be stopping at the corporate level. According to another Reuters report, a research note from Merrill Lynch released yesterday reported that earnings growth for companies in the Standard & Poor's 500 index stands at 14 percent, double the rate of estimates before the reporting season started.