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Fed raises US interest rate to 2.25%
The Federal Reserve pushed U.S. interest rates up by a modest quarter-percentage point on Tuesday and expressed confidence that inflation could be kept at bay by slowly lifting credit costs from rock-bottom levels.
It was the fifth straight increase this year. The decision was widely expected and market reaction was limited. Still, stocks gained, the dollar dipped and Treasury bond prices rose as the Fed failed to show any discomfort with the inflation outlook as a few analysts had expected. "With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," the central bank said in a signal of a further gradual ratcheting up of rates. However, it repeated a pledge to respond to incoming data as necessary to keep inflation in check. While some economists wondered before the meeting whether the Fed might warn of a heightened risk of price pressures and signal a willingness to step up rate action, the central bank restated its view that risks to the economy were balanced between inflation and renewed weakness. "There's nothing in here to suggest that they're going to change from a measured pace to be more aggressive," said Stuart Hoffman, chief economist at PNC Financial Services Group.
The vast majority of top Wall Street economists in a Reuters poll expect another rate hike in February while 16 of 22 large firms surveyed see an increase in March as well. In the wake of the Fed's decision, several banks announced increases in prime lending rates charged for loans to their best customers. While prime rates are used as a benchmark for some loans, not all consumer borrowing costs will necessarily rise. Mortgage rates, for example, are often tied to yields on government bonds, which changed little on Tuesday. UPWARD AND ONWARD The Fed has raised rates a quarter-point at each of its last five meetings and the central bank's statement bolstered expectations for further increases in 2005. Markets have priced in a rate hike at the next gathering in early February and see a likely boost to borrowing costs at the subsequent meeting in March as well. The Fed started on its "measured" increases in June, when rates stood at a 1958 low of 1 percent after 13 rate cuts to help the economy through the 2001 recession and a slow recovery. Since that first rise in June, the post-meeting statements have changed little.
On Tuesday, the Fed nodded to a recent easing in oil prices, which hit record highs in late October, and a soft figure on job creation in November. "Output appears to be growing at a moderate pace despite the earlier rise in energy prices, and labor market conditions continue to improve gradually," the Fed said. The U.S. economy grew at a respectable 3.7 percent annual rate in the third quarter and job gains have averaged 178,000 over the last three months -- not spectacular but fast enough, analysts say, to whittle away at the unemployment rate. Economists say inflation risks will likely rise as the jobless rate, which dipped last month to 5.4 percent, falls. The Fed's preferred measure of core inflation -- a price index for personal spending outside of volatile food and energy costs -- remains within the central bank's comfort zone. However, production costs are rising and another popular price gauge, the Consumer Price Index, has been climbing even with food and energy costs stripped out. A drop in the dollar could also contribute to rising U.S. inflation pressures as prices for imported goods rise. The Fed's action on Tuesday moved the U.S. overnight rate a quarter-point above official rates in the 12-nation euro zone, which may lend some support to the beleaguered greenback by attracting yield-hungry investors. Along with raising its target for the rate banks charge each other for overnight loans, the Fed also hiked the largely symbolic discount rate, charged for loans it makes directly to banks, by a quarter-point to 3.25 percent. In addition, it revealed plans to speed up the release of minutes its policy sessions, which could offer markets fresh insight into the thinking of policy-makers. In the past, FOMC minutes were released after the panel's subsequent meeting, a lag of about six weeks. Now, the Fed said minutes will come out just three weeks after each meeting. |
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![The Federal Reserve raised U.S. interest rates on December 14, 2004 by a quarter-percentage point for the fifth time this year and said it will keep gradually lifting them from rock-bottom levels as the economy grows. The unanimous and widely expected decision by the central bank's policy-setting Federal Open Market Committee moves the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 2.25 percent from 2 percent. [Reuters]](xin_09120115080623107921.jpg)
![The Federal Reserve raised U.S. interest rates on December 14, 2004 by a quarter-percentage point to 2.25 percent, the fifth increase this year. Fed Chairman Alan Greenspan is shown testifying on Capitol Hill Feb. 25, 2004. [Reuters]](xin_09120115080635602332.jpg)
