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 user 2005-03-23 at 10:28:00 am Views: 74
  • #10998
    Federal Reserve Raises Interest Rates for Seventh
    Fed Bumps Up Key Rate to Check Inflation
    Action Will Trigger Higher
    Borrowing Costs for Consumers

    WASHINGTON (March 05) – The Federal Reserve on Tuesday
    pushed a key interest rate up by a quarter-point to 2.75 percent as it continued
    its campaign to gradually nudge rates high enough to make sure that a rebounding
    economy does not trigger unwanted inflation.

    The increase in the federal funds rate, the interest that
    banks charge each other, marked the seventh time the central bank has pushed
    rates higher since it started its current credit tightening campaign last June.
    At that time, the funds rate stood at a 46-year low of 1 percent.

    The Fed kept language that it has used with every rate
    increase, saying that future rate hikes would occur ”at a pace that is likely
    to be measured,” language seen as indicating continued quarter-point moves at
    the central bank’s regular meetings.

    Some economists had suggested that the ”measured” pledge
    might be dropped at this meeting, given the recent surge in oil prices to above
    $57 per barrel.

    The Fed’s action quickly translated into higher borrowing
    costs for millions of consumers and businesses, with commercial banks pushing
    their prime lending rates up by a similar quarter-point to 5.75 percent. The
    action was led by announcements from Wells Fargo and Cleveland-based

    The Fed’s brief statement kept the pledge to move rates at
    a ”measured” pace and kept the assessment that the risks going forward were
    balanced between the threat of inflation and the threat that the economy might
    soften unexpectedly.

    However, the Fed did indicate somewhat more concern about
    inflation, saying, ”Though longer-term inflation expectations remain well
    contained, pressures on inflation have picked up in recent months and pricing
    power is more evident.”

    But the Fed said that it did not believe that the rise in
    energy prices had ”notably fed through to core consumer prices.”

    Analysts said this comment supported a view voiced by
    Federal Reserve Chairman Alan Greenspan and other Fed officials that while
    energy prices have been increasing, those higher costs have not triggered higher
    overall inflation pressures. But economists said they detected slightly more
    concern about inflation in the Fed’s new statement.

    ”I think the tone is slightly more hawkish and it could
    lead to slightly higher interest rates by year’s end,” said economist David
    Jones, the author of four books on the Greenspan Fed.

    Wall Street also focused on the Fed’s inflation comments.
    The Dow Jones industrial average, which had been up by 42 points before the
    Fed’s mid-afternoon announcement, dipped into negative territory after the
    announcement as investors feared more aggressive rate hikes in the months to

    Jones said that he now expected the funds rate could be as
    high as 3.75 percent by the end of the year, meaning one more quarter-point rate
    increase than he had been expecting before Tuesday’s meeting. He said that
    30-year mortgage rates, currently near 6 percent, could be at 6.75 percent by
    year’s end, still a low-enough level that the housing industry should remain
    strong this year.

    Analysts said the Fed had to be pleased by recent signs of
    economic strength including the report that 262,000 new jobs were created in
    February, the biggest gain in four months.

    Many economists believe the economy has been growing at a
    rate above 4 percent in the January-March quarter.

    So far, the so-called core rate of inflation, excluding
    volatile energy and food prices, has stayed well-behaved at the retail

    While core inflation rate at the wholesale level shot up by
    0.8 percent in January, the fastest pace in more than six years, the government
    reported Tuesday that these price pressures eased significantly in February,
    with core wholesale prices rising by only 0.1 percent.

    Many analysts are looking for oil prices to retreat in
    coming months, helping inflation pressures to subside.