On June 30, the Federal Open Market Committee raised its federal funds rate target from 1% to 1 1/4%, initiating an anticipated series of rate hikes to return policy to a neutral stance. The previous action—a 1/4 point rate decrease one year ago—was followed by a deliberate, transparent policy stance designed to maintain an accommodative policy for “a considerable period.” The steady 1% overnight yield exceeded virtually every measure of inflation expectations, producing a negative real return. Though such a policy was widely understood to be unsustainable, concerns about slow employment growth and the slight probability of deflation offset concerns about a rise in inflation through mid-March.
Suggested citation: "Monetary Policy," Federal Reserve Bank of Cleveland, Economic Trends, no. 04-08, pp. 04, 08.01.2004.