The Federal Reserve boosted interest rates by a quarter of a percentage point yesterday on Fed Chairman Alan Greenspan's last day on the job, and signaled that the rate-tightening cycle is nearing an end.
With yesterday's move, the Fed has increased short-term rates at 14 consecutive meetings since June 2004 to a five-year high of 4.5 percent.
Greenspan said goodbye after more than 18 years as the nation's chief economic guru and 149 meetings of the Federal Open Market Committee. During his lengthy tenure, the country not only enjoyed the longest economic expansion in its history, it also sustained price stability that was in marked contrast to the punishing high inflation rates that blighted the U.S. economy in the 1970s and early 1980s.
The die-hard sports fan got a baseball glove on his last day at the central bank - and a standing ovation. In return, he gave a pep talk urging Fed employees to keep up the good fight to protect the value of the dollar against the ravages of inflation.
"We have a very special mission," Greenspan told about 1,500 employees who filled the two-story marble atrium at the Federal Reserve headquarters in Washington. "We are in charge of the nation's currency, and the central bank, because of that, is involved in everyone's daily lives. We are the guardians of their purchasing power," he said.
At an earlier luncheon, Greenspan had told colleagues that he would be looking on from the sidelines and cheering their efforts to do "extraordinary things."
Regarding rate increases, most observers believe that at least one more will be required before the Fed decides rates have attained a "neutral" level, which neither stimulates the economy nor restricts its growth.
But by subtly softening the language it employed to describe the economy's health, the central bank made it clear that rates are approaching such a point. For example, in mid-December the Fed declared that "some further measured policy firming is likely to be needed." Yesterday, it said simply that "some further policy firming may be needed."
For observers accustomed to scrutinizing the Fed's statements for clues about future rate trends, the new language spoke volumes. "The Fed sounded a bit less certain about the need for future rate hikes, saying further policy firming 'may' be needed," noted A.G. Edwards market strategist Al Goldman.
By dropping the word "measured" and substituting the word "may" for "is likely," echoed Nomura chief economist David Resler, the Fed is suggesting that it's now "more confident but still not yet certain" that it can balance economic growth and price stability with rates at the current level.
Still, the Fed seemed to be hinting that members of its rate-setting committee "will take some persuading not to hike again" when they convene next, in late March, said High Frequency Economics economist Ian Shepherdson.
The statement, according to Resler and other observers, means future Fed moves will be "data-dependent."
Until now, in other words, the Fed's rate-increase program has been aimed at bringing rates back to neutral from their earlier low and extremely stimulative level. But future rate decisions, in contrast, will be made in reaction to incoming economic data, rather than an effort to bring an unsustainably low rate back into equilibrium.
"We are definitely in the neighborhood of a neutral fed funds rate," said Clear View Economics economist Ken Mayland, referring to the rate banks charge one another for overnight loans.
Although "chances are that the Fed will lift rates again" when it meets March 28, he said, yesterday's softer language will provide incoming Fed chief Ben Bernanke - who was confirmed yesterday by the Senate - with some "wiggle room" if he decides that a pause in the rate increases makes sense.
James P. Miller writes for the Chicago Tribune.
The Associated Press contributed to this article.