The era of extra-cheap credit began to recede last week when Federal Reserve officials raised a key short-term interest rate for the first time in four years.
Yet no one seemed to blink. Although stocks usually drop when interest rates rise, Wall Street shrugged off the quarter-point increase in the benchmark rate, closing slightly up for the day the increase was announced. Bond prices were similarly unruffled.
That imperturbability may be more remarkable than the Fed's actual decision to boost the federal funds rate, which influences borrowing costs throughout the economy, to 1.25 percent from a 46-year low.
The move came as last week's data showed an economy still struggling to maintain its momentum, with disappointing job growth and flat personal income growth, after adjusting for inflation and taxes. Economists can debate whether the Fed's decision was correct, but there's little doubt its strategy to avoid market turmoil was successful.
It was, as several economists noted, the most telegraphed rate tightening in Fed history. The signals from the once secretive central bank have been coming at an increasing pace since the economy started to pick up steam earlier this year. In March, the Fed said it would be "patient" about raising rates. In May, as some economic data showed an increase in hiring, Fed policymakers dropped their commitment to patience and warned that they would raise rates at a "measured" pace -- a sign that many correctly interpreted to mean a rate increase in June.
In testimony before Congress and in speeches, Fed officials went even further to let the public in on their intentions. Fed Chairman Alan Greenspan, for example, called the low rate "increasingly unnecessary." Short of hiring a skywriter to draw up arrows in the sky, the Fed couldn't have been more open about what was going to happen. It's no wonder that bond prices began tanking months ago, leading to the worst quarter for Treasurys in 25 years.
The new transparency policy is a marked change from 10 years ago, when the Fed started another rate-tightening cycle to curb inflation, doubling the short-term interest rate from 3 percent to 6 percent in about a year. The fast, aggressive action caught the market unprepared, with the ensuing turmoil contributing to the bankruptcy of Orange County, Calif., the Mexican peso crisis and the fall of brokerage firm Kidder Peabody & Co.
In raising rates last week, Fed officials signaled that the central bank may raise rates more as the economy grows stronger, but again said it would do so "at a pace that is likely to be measured."
It's anyone's guess where the Fed will set rates at its next meeting in August, or even a year from now. But if the central bank continues its policy of sending clear signals, getting there could be relatively painless.