- The Washington Times - Tuesday, November 1, 2005

ASSOCIATED PRESS

The Federal Reserve, still concerned about inflation, raised a key interest rate yesterday to the highest level in more than four years and signaled that more increases are likely.

The Fed announced it was pushing its target for the federal funds rate, the interest that banks charge each other, to 4 percent from 3.75 percent, where it had been since the Fed’s last interest-rate meeting on Sept. 20.

It marked the 12th consecutive quarter-point increase since the Fed began gradually raising rates in June 2004 to ensure that a growing economy did not generate higher inflation.

Higher interest rates fight inflation by slowing economic activity. The higher rates dampen consumer demand for such items as autos and houses and raise the cost of borrowing for businesses.

On Wall Street, stocks made a brief rebound into positive territory after the Fed’s midafternoon announcement but then lost ground on a disappointing earnings forecast from computer giant Dell Inc.

The Dow Jones Industrial Average fell 33.30, or 0.32 percent, to 10,406.77.

Broader stock indicators also dropped. The Standard & Poor’s 500 Index fell 4.25, or 0.35 percent, to 1,202.76, while the Nasdaq Composite Index was dragged down by Dell, slipping 6.25, or 0.29 percent, to 2,114.05.

In a brief statement explaining yesterday’s action, the Fed retained language it has been using, which said it believes future interest rates can occur “at a pace that is likely to be measured.” That phrase is seen as a signal that the Fed plans to keep raising rates at a gradual pace of quarter-point moves at coming meetings.

Yesterday’s rate increase had been widely expected, given that a number of Fed officials in recent weeks have expressed worries that the sharp rise in energy prices that occurred in early September presented the danger of more widespread inflation pressures down the road.

The Fed rate increase was quickly followed by an increase in commercial banks’ prime lending rate, led by Cleveland-based KeyCorp. The prime was raised by a quarter-point to 7 percent, the highest level for this benchmark for consumer and business borrowing since June 2001.

Many analysts believe the Fed will keep raising interest rates at its final meeting of this year Dec. 13 and at its first meeting of 2006, on Jan. 31.

Two more quarter-point increases would push the funds rate to 4.5 percent at the Jan. 31 meeting, which will be Federal Reserve Chairman Alan Greenspan’s final meeting. He is stepping down with the end of his term on the board, concluding more than 18 years at the central bank.

President Bush last week nominated Ben Bernanke, his top White House economic adviser to succeed Mr. Greenspan. Mr. Bernanke has said that his “first priority” will be to maintain continuity with Mr. Greenspan’s policies.

People who know both Mr. Greenspan and Mr. Bernanke said Mr. Bernanke’s pledge to follow Mr. Greenspan’s policies is very credible when considering the close working relationship the two maintained when Mr. Bernanke served from 2002 to June of this year as a Fed board member.

A number of Fed officials in speeches in October voiced concern about the potential threat of rising inflation. The Fed’s most recent survey of the economy, the Beige Book, noted that prices were increasing for everything from lumber and hardware to hotel rooms.

Also, the Labor Department reported that consumer prices in September shot up by 1.2 percent, the biggest one-month increase in a quarter-century, led by a record rise in energy prices. This reflected the effect of hurricane-forced production shutdowns along the Gulf Coast.

And, it was reported yesterday, the nation’s manufacturing activity grew at a slower pace during October as companies increasingly felt the strain of a continuing rise in energy and raw materials prices, the Institute for Supply Management said. The ISM’s measure of costs, its prices index, rose to 84 in October from a reading of 78.

Meanwhile, the Commerce Department said construction activity rose 0.5 percent to an all-time high of $1.12 trillion at a seasonally adjusted annual rate in September as builders took advantage of interest rates that are still low by historical standards.

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