WASHINGTON – The Federal Reserve boosted a key short-term interest rate by one-quarter percentage point Wednesday, the fourth increase this year. It’s part of a credit tightening campaign to bring rates back up to more normal levels now that the economy’s recovery from the 2001 recession is more deeply rooted.
Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues – who set interest rate policy in the United States – increased the target for the federal funds rate to 2 percent from 1.75 percent.
The funds rate is the interest banks charge each other on overnight loans and is the Fed’s primary tool for influencing economic activity.
In response to the Fed’s 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 to 5 percent from 4.75 percent.
The Fed’s current rate-raising campaign began in June with a quarter-point boost, marking the first rate increase in four years. The Fed bumped up rates again by a quarter-point in August and September and then once more Wednesday.
Fed policy-makers stuck to their view that future rate increases would be gradual. They said rates could rise at a pace likely to be “measured,” retaining language contained in previous statements.
On the economy, the Fed said it “appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved.”
The Fed also said inflation and longer-term inflation expectations “remain well contained,” another reason the Fed can stick with its gradual approach to raising rates.
The vote was unanimous.
“Monetary policy-makers seem quite pleased with the current state of the economy,” said Lynn Reaser, chief economist at Banc of America Capital Management. Still, she said, “The Fed’s task is not complete. Policy-makers want to see rates at more normal levels with the belief the economy no longer needs the prop of excessively low interest rates.”
On Wall Street, the Dow Jones industrials were up around 42 points in trading after the Fed’s announcement.
The Fed’s latest rate increase comes as many economists believe the economy has emerged from a late spring and early summer soft patch.
The economy added a sizable 337,000 jobs in October, the most since March, the government said last week. While the figures were helped by job gains related to hurricane cleanup efforts, they nonetheless raised hopes that the recovery in the labor market, which has been uneven, is gaining some real traction.
The pickup in October’s payrolls was welcome news to President Bush, who sparred frequently with Democratic rival Sen. John Kerry over the health of the labor market and job losses that have occurred since Bush took office in January 2001.
Economists believe the odds are increasing for the Fed to boost the funds rate again on Dec. 14, at its last meeting of the year. Before the good news on October payrolls, many economists believed the Fed would probably stand pat at the December meeting.
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