There's That Rally

Today's bounce has a historial analog.
March 21, 2000. FOMC Policy Statement:
The Federal Open Market Committee voted today to raise its target for the federal funds rate by 25 basis points to 6 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 5-1/2 percent.

Economic conditions and considerations addressed by the Committee are essentially the same as when the Committee met in February. The Committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion.

Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.

In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City and San Francisco. The discount rate is the rate charged depository institutions when they borrow short-term adjustment credit from their district Federal Reserve Banks.

March 21, 2000 coverage. CNN Money: Fed lifts key rates again. Some excerpts from a rather long article back when people actually read things:
Tuesday lifted short-term interest rates by another quarter point -- the fifth increase in less than eight months -- in an effort to slow the seemingly unstoppable U.S. economy and ensure prices for goods and services remain in check.

It also put another warning shot over Wall Street's bow that it likely will raise rates again in the face of what it sees as a risk for an outbreak of inflation.

As expected, the Fed's policy-making arm raised its influential Fed funds target for overnight loans between banks to 6 percent, the highest since mid-1995 -- a point where the Fed decided to lift the release brake following a series of aggressive rate increases that generated what many on Wall Street call a "soft landing." It also raised its less tinkered with discount rate -- the rate at which the Fed's 12 district banks lend directly to financial institutions -- to 5.5 percent, the highest for that rate since August 31, 1991.

For financial markets, the rate increase and the short announcement that followed was a non-event, mostly because Wall Street had widely expected the Fed to do exactly what it did. Stocks turned in a positive performance in the wake of the announcement, while bonds held on to gains already made before the Fed's statement crossed computer screens mid-afternoon.

"As far as we can tell, just about everyone now expects another 25-basis-point hike on May 16, which rather begs the question why the Fed did not act more boldly today and raise rates by 50 basis points," said Ian Shepherdson, chief U.S. economist with High Frequency Economics. "By the time of the May meeting, a bigger move might be forced upon the FOMC."

The big difference between now and then is that inflation was feared, not already an obvious problem.

The Hill: Fed faces ‘very challenging’ fight against inflation

“With the Fed front-loading hikes, the debate about a soft landing for the economy will intensify. History would suggest the odds of a soft landing are low because 11 of the past 14 rate-hike cycles have been followed by a recession within two years,” said Ryan Sweet, senior director at Moody’s Analytics, in a Wednesday analysis.

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