By MICHELLE ROSSMANAssociated PressWASHINGTON (AP) The Federal Reserve’s decision to raise interest rates to an unprecedented record has created a massive boom in money markets and sent markets tumbling, raising questions about whether the central bank is too quick to tap into its vast reserves.
The Federal Open Market Committee (FOMC) met Monday for its annual meeting.
The committee voted 5-1 to keep its benchmark interest rate at 1 percent for now, but it could eventually lower it further to 1.5 percent.
The committee has already signaled that it will continue to ease monetary policy for several more months, but its decision on interest rates is likely to trigger a massive run-up in interest rates in the months ahead.
It’s likely to bring more uncertainty to markets and send them into a tailspin.
Investors are expecting the Fed to cut its benchmark rate by a full percentage point next month, according to a Bloomberg survey of traders and economists.
The Fed is also expected to begin its quarterly bond-buying program, which normally would cost $85 billion.
There is no easy way to predict what the Fed will do next.
It could be a more gradual move, or it could be more dramatic, as happened last year when the Fed cut its interest rate by more than 2 percentage points.
The market is also watching closely to see if it raises rates too quickly, as it did last year.
A major market rally in early December, after the Fed announced it would raise rates by a quarter-point, triggered a rally in equities.
That was followed by a sharp selloff, and then the markets reversed course.
The next move was to raise rates again last month.
The Fed is already spending $1 trillion this year, which is already far above the $1.8 trillion it spent last year, the Fed said Monday.
The $1 billion increase in December is about 4 percent of the total it spent in the previous 12 months.
The central bank’s purchases have helped spur an unprecedented run-rate in the money markets.
They have been boosted by the Fed’s actions to buy Treasury securities, which it purchased in September and October, as well as mortgage-backed securities, the Federal Deposit Insurance Corp. said.
The market has seen some big rises.
Traders are anticipating the Fed would begin buying $1 bills next month.
If it does, they will be worth about $1,500 a pop, up from $750 a pop in mid-December, the FOMC said.
Investors are expecting a sharp run-off in prices of Treasury securities.
The dollar rose on Monday, with the dollar index rising to a three-week high against a basket of currencies.
The dollar rose against the euro and Japanese yen, while the euro tumbled to a six-week low against the greenback.
The yen also hit a five-week peak against the dollar.
Inflation expectations are also moving in the wrong direction.
The Bank of International Settlements forecast that inflation will remain below 2 percent in the second half of this year.
The U.S. is set to have its first rate hike in nearly a decade.
The FOMc is also forecasting that economic growth in the U.s. will fall short of 3 percent in 2018.
The unemployment rate will be 6.3 percent, according the agency.