Fed Hikes Federal Funds Rate Up a Quarter Point

June 30, 2004 (PLANSPONSOR.com) - The Federal Open Market Committee (FOMC) voted to raise its target for the federal funds rate by 25 basis points to 1.25%.

The decision to raise rates came at a time when the FOMC sees an expansion at a “solid pace” of both output and labor market conditions and does not foresee any adverse reaction in the markets to the quarter point increase.   “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,” the FOMC said in its customary  announcement news release .

The Fed’s decision marks the first rise in interest rates in four years.   The previous 1% rate was the lowest level for the federal funds rate in 46 years.

Notable among the language of the FOMC’s announcement is the continued use of the “measured language” as the Fed keeps a watchful eye on inflation: “With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.”   

Speaking on CNBC shortly after the FOMC’s announcement, Bill Gross, Chief Investment Officer at PIMCO, reiterated this concern with regards to bond investments, pointing to inflationary indicates as the real measure of bond trading in the short-term. “I think my sales of bonds in the future depends on the pace of inflation.”   Gross added that in the immediate term, that outlook is favorable, because of his observations that the bond market has already anticipated as much as 200 basis points of Fed tightening.  

Interest rate policy is important for plan sponsors because many plans’ loan interest rates are tied to the Prime Rate.