Markets on Fed Day: Half Point or Bust

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Alan Greenspan's implacable program of interest rate hikes may have its disbelievers in Congress and on the CNBC pundit scene, but the financial markets are not among the heretics. So it was that Wall Street continued to rally as the Fed voted to raise short-term rates not just 25 but 50 basis points at its meeting Tuesday, the latest attempt to hamstring the swaggering U.S. economy just enough to keep inflation at bay. Businesses, especially capital-intensive ones like the dot-coms, have no love of more expensive money. But Father Greenback has sold the markets on his firm hand, says TIME senior economics reporter Bernard Baumohl, and a full half-point hike was the only way for Greenspan to reward that confidence now. "The markets were worried for a moment that the Fed was behind the curve, but Greenspan realizes that in spite of all the tapping of brakes with the five quarter-point hikes, the economy seems impervious." And when the economy gets impervious, the Fed gets worried about inflation.

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Not that inflation is actually apparent; witness Tuesday's pre-opening announcement that consumer prices were unchanged in April. "The markets are taking it on faith," says Baumohl, that Greenspan is right about lurking price pressures, and a half-point hike is seen as welcome proof of his vigilance. "Fifty basis points means the Fed is in charge again and inflation is under control," he says. "The markets have already discounted it. They're happy about it. Anything less would have be met with disappointment." A half-percent increase also raises the hope that this hike will actually work, slowing the economy enough to remove the need for another increase at the Fed's June 28 sit-down. Which gives Wall Street six weeks to divine Greenspan's will all over again.