May 1997 Click here for an index of Economic Outlook . In response, Mr. Greenspan and the Federal Open Market Committee raised the federal funds rate by 25 basis points, from 5.25 percent to 5.50 percent, before overt signs of accel-erating inflation appeared. The Effects of the Fed Funds Rate Market analysts have so far forecast a remarkably benign outlook for U.S. interest rates and, in turn, for global financial markets. Many have suggested that another 25 basis points or, at most, another 50 basis points of increases in the federal funds rate over the balance of 1997 can accomplish Even as the Fed begins tightening preemptively with inflation under control, substantial rate increases may be required to slow growth to a sustainable level. Few analysts have offered many suggestions as to why a preemptive tightening of only 50-75 basis points could slow the U.S. economy in the 1990s.
History suggests otherwise.
Even as the Fed begins tightening preemptively with inflation under control, substantial rate increases may be required to slow growth to a sustainable level. During the noninflationary period between 1955 and 1965, when U.S. prices were rising 1.0-1.5 percent per year, considerably below current levels of about 3.0 percent, there were three Fed tightening cycles. On average, the tightening cycles lasted for thirty months and resulted in increases in the federal funds rate of 300 basis points. Few analysts have offered many suggestions as to why a preemptive tightening of only 50-75 basis points could slow the U.S. economy in the 1990s. With a 5.5 percent fed funds target, the inflation-adjusted fed funds rate is about 2.5 percent.