Federal Reserve Board Chairman Alan Greenspan ended the era of lowest-in-a-lifetime interest rates today and did it so gracefully that Wall Street cheered.
Ignoring the usual rule that higher rates are bad for the stock market, stock prices eased upward today after the Fed began the long-awaited but no-longer-feared increase in rates by hiking the rate on overnight loans to banks from 1 percent to 1.25 percent.
The Dow Jones industrial average gained 22 points to 10435.48. The Standard & Poors 500 stock index advanced 5 points to 1140.84. The Nasdaq Stock Market composite index was up 13 points to 2047.79.
Even more surprising, some interest rates actually went down, demonstrating that traders who were trying to anticipate the Fed's move had overreacted. Rates on 10 year government bonds fell by .09 percent and rates on two-year bonds retreated by .13 percent.
Consumers, however, can count on most rates to behave as expected and go up in line with the Fed's move. That should mean they will collect slightly higher rates on money market accounts but pay higher rates on home equity loans, most of which are tied to the bank prime rate, which is expected to follow the Fed's lead.
Mortgage rates have already gone up about three-quarters of a percentage point in response to Greenspan's well-advertised action. Again contrary to conventional wisdom, home building stocks rose after today's announcement. Shares of NVR Inc., the biggest builder in the Washington area, rose $9.20 a share to $484.20, a gain of almost 2 percent.
The market reaction indicated Greenspan's strategy of signaling his intentions well in advance is working precisely the way it is supposed to. The Fed also gave Wall Street the word it was looking for in the message that was issued to explain the move. Future interest rate increases will be "measured" the Fed promised. Rates will go up only enough to keep inflation in check.
The Dow was up 0.75 percent for the quarter, the S&P 500 up 1.3 percent, the Nasdaq composite up 2.75 percent. The Washington Post Bloomberg regional stock index of companies based in the District, Maryland and Virginia barely budged, gaining just 0.23 over the last three months.