Settings Are In Neutral

The US FOMC raised interest rates by 0.25% to 4.25% last night and the market immediately jumped from being 10 points up on the announcement to more than 90 points up before settling 55 points up. Mortgage rates were immediately lifted by lending houses from 7% to 7.25%. It was the 13th interest rate rise in 18 months, and took rates to a four-and-a-half year high.

The market jumped because the FOMC changed the rhetoric slightly and dropped the word "accommodative". Prior to today the key phrase from the Federal Reserve Board has been "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured". The new phrase was that:

• "Some further measured policy firming is likely to be needed".

Use of the word "accommodative" for the last 18 months has suggested that rates were stimulating the economy. The inference is that they are now having no impact on the economy; in other words interest rate settings are now "neutral". That implies the cycle of rising interest rates is coming to an end '¦ but not just yet. Here are a few of the quotes:

• ECONOMY SOLID. "Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid".
• INFLATION WELL CONTAINED. Core inflation had "stayed relatively low in recent months and longer-term inflation expectations remain well-contained".

The expectation is that we have another interest rate rise on the cards at Fed chairman Alan Greenspan's last meeting on January 31. Economists are now dividend on whether the Fed will take rates above 4.5% to 4.75% or 5.0%.

It will be a call for Ben Bernanke, Greenspan's successor.