In raising the federal funds rate, the Fed believes it can nip inflation in the bud. Lisa Stark explains the Fed's rationale. This might end up being more trouble than it's worth.
Basis points are the smallest measure of interest rates.
An interest rate of 5 percent is 25 basis points greater than an interest rate of 4.75 percent. But the accompanying statement by policy-makers shifting back to a neutral stance caused confusion. The stock market seized on this and took off, which might be the last thing the Fed wanted to see. The September federal funds contract, which trades on the expectation of changes in policy, on Wednesday was only discounting a 52 percent chance of another rate hike by September, compared with 80 percent on Tuesday. Sources believe the Fed shifted back into neutral because the bias had generally been used to signal that the Fed was considering an inter-meeting move.