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Fed boosts rate a quarter point Original Source Link: (May no longer be active)
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Fed Boosts Interest Rate a Quarter Point
Jun 30, 2:55 PM (ET)
By JEANNINE AVERSA
WASHINGTON (AP) - The Federal Reserve boosted a key short-term interest rate by a one-quarter percentage point Wednesday, its first rate increase in four years, in an attempt to keep the economy and inflation on an even keel.
Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest rate policy in the United States - increased the federal funds rate to 1.25 percent. The funds rate, the Fed's primary tool for influencing economic activity, had been at 1 percent, a 46-year low, for a year.
As a result of the Fed's unanimous decision to push up the funds rate, commercial banks' were expected to increase by a corresponding amount their prime lending rate for many short-term consumer and business loans. The prime rate, which has been at 4 percent, the lowest level in more than four decades for a year, is expected to rise to 4.25 percent.
The economy has been a hot topic in the presidential campaign with President Bush insisting things are rebounding and Sen. John Kerry talking about a squeeze on the middle class. Analysts said voters will likely see little impact on the economy between now and November from the Fed's action.
On Wall Street, the Dow Jones industrials gained around 8 points after the Fed's announcement.
Fed policy-makers, wrapping up a two-day meeting Wednesday, also held to the view that they could gradually raise rates to head off inflation. The Fed said it believes any rate increases can be "at a pace that is likely to be measured."
Economists said hints at further, modest one-quarter point rate increases in the future, including one at the next meeting on Aug. 10.
The Fed made clear, however, if will take more aggressive action if needed. This restated a position that Greenspan had articulated earlier.
"The committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," the Fed policy-makers said.
Their latest assessment of the state of the economy was upbeat. The Fed said the economy is expanding at a solid pace and that labor markets are improving. On the inflation front, the Fed said that "although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors."
Lynn Reaser, chief economist at Banc of America Capital Management, said: "We are now at a very important turning point for monetary policy. The Fed is now acting to ensure that the economy can continue to expand at a good pace but that success in restraining inflation can be retained."
Hours before the Fed's announcement, White House, spokesman Scott McClellan said: "It's not unexpected that as the economy continues growing stronger that interest rates may rise some. That's not something at this point that is a concern."
A one-quarter point increase would not deter the economic recovery, but it will put the Fed on a course of higher borrowing costs, geared in part to head off inflation, economists said.
For the first five months of this year, consumer prices rose at an annual rate of 5.1 percent, exceeding the 1.9 percent increase for all of last year. Excluding volatile energy and foods costs, "core" prices increased at a rate of 2.9 percent, compared with a 1.1 percent advance registered for 2003.
Although the current rate of inflation is still low by historical standards, businesses are finding it easier to raise prices now than during the economic slump.
Some economists predict the funds rate could rise to 2 percent by the end of this year, which would mean the prime rate would move up by a corresponding amount to 5 percent.
The economy, which was knocked down by the 2001 recession and jolted by the Sept. 11, terror attacks and corporate accounting scandals, finally staged a material rebound in the second half of last year.
The economy grew at a decent 3.9 percent annual rate in the first quarter of this year. But projections for the current quarter are wide-ranging, from a 2.5 percent rate to just over a 4.5 percent pace. Economist say estimates would be stronger if not for the expectations that higher energy costs will probably dampen consumer spending, a key force in the economy.
Companies, meanwhile, have stepped up hiring in the last several months, signaling a long-awaited turnaround in the labor market. The economy added 248,000 jobs in May, compared with a loss of 28,000 for the same month last year.
The Labor Department will release the employment figures for June on Friday.
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