- The Washington Times - Wednesday, February 2, 2005


The Federal Reserve yesterday boosted interest rates for the sixth time since last June and signaled that it might raise the cost of borrowing money further to help contain inflation.

The Fed announced that it was raising its target for the federal funds rate, the interest that banks charge each other, by a quarter-point to 2.5 percent. Before the Fed began tightening credit last June, the funds rate had been at a 46-year low of 1 percent.

The February increase is not expected to be the last. Analysts think the Fed will push the funds rate up in quarter-point increments throughout most of this year.

That would mean higher borrowing costs for consumers and businesses. The Fed’s action yesterday was quickly followed by an announcement from Wells Fargo Bank that it was boosting its prime lending rate by a quarter point to 5.5 percent. Other banks were expected to follow suit.

In explaining its action, the Fed repeated a previous promise that it thought it would be able to raise rates at a “pace that is likely to be measured.”

Analysts think the Fed will keep raising rates in small quarter-point steps as long as there are no signs that inflation is becoming a problem.

“What this says in a nutshell is that the economy is right where the Fed wants it to be,” said David Jones, head of DMJ Advisors. “Inflation is contained, and the Fed is happy about that.”

Consumer prices rose by 3.3 percent last year, compared with a 1.9 percent rise in 2003. It was the biggest annual increase since 2000, but it was driven by a surge in energy prices. Inflation pressures are expected to moderate this year, helped by an expected continued decline in global oil prices.

“The Fed is taking its foot off the accelerator without hitting the brakes,” said Richard DeKaser, chairman of an American Bankers Association panel of economists that meets twice a year with Fed policy-makers.

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