This week, as widely expected, Alan Greenspan and his colleagues at America's Federal Reserve raised the federal funds rate for the sixth time since last June, to 2.5%. Six rate rises at six successive meetings may sound tough, yet real interest rates (estimated by the federal funds rate less the headline rate of consumer-price inflation) are still negative. And not content with running a lax monetary policy at home, America is also exporting its super-loose ways around the globe. America's monetary policy is still extraordinarily slack. Real interest rates are three percentage points lower than they have been, on average, at the same stage of previous economic recoveries since 1961 (see chart). Furthermore, according to an index compiled by Goldman Sachs, overall monetary conditions are still slightly easier today than when the Fed started tightening last June: a weaker dollar, lower bond yields and higher share prices have offset higher short-term interest rates. Even so, futures contracts suggest that the financial markets expect interest rates to be raised to only 3.5% by the end of 2005, leaving real rates still quite low.
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