- The Washington Times - Tuesday, March 22, 2005


The Federal Reserve yesterday pushed a key interest rate up by a quarter-point to 2.75 percent as it continued its campaign to gradually nudge rates high enough to make sure that a rebounding economy does not trigger unwanted inflation.

The increase in the federal funds rate, the interest that banks charge each other, marked the seventh time the central bank has pushed rates higher since it started its current credit-tightening campaign last June. At that time, the funds rate stood at a 46-year low of 1 percent.

The Fed kept language that it has used with every rate increase, saying that future rate increases would come “at a pace that is likely to be measured,” language seen as indicating continued quarter-point moves at the central bank’s regular meetings.

Some economists suggested that the “measured” pledge might be dropped at this meeting, given the recent surge in oil prices to above $57 per barrel.

The Fed’s action quickly translated into higher borrowing costs for millions of consumers and businesses, with commercial banks pushing their prime lending rates up by a similar quarter-point to 5.75 percent. The action was led by announcements from Wells Fargo & Co. and KeyCorp.

The Fed’s brief statement kept the pledge to move rates at a “measured” pace and kept the assessment that the risks going forward were balanced between the threat of inflation and the threat that the economy might soften unexpectedly.

However, the Fed did indicate somewhat more concern about inflation, saying, “Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident.”

But the Fed said that it did not believe the rise in energy prices had “notably fed through to core consumer prices.”

Analysts said this comment supported a view voiced by Fed Chairman Alan Greenspan and other Fed officials that while energy prices have been increasing, those higher costs have not triggered higher overall inflation pressures. But economists said they detected slightly more concern about inflation in the Fed’s new statement.

“I think the tone is slightly more hawkish and it could lead to slightly higher interest rates by year’s end,” said economist David Jones, the author of four books on the Greenspan Fed.

Wall Street also focused on the Fed’s inflation comments. The Dow Jones industrial average, which had been up by 42 points before the Fed’s midafternoon announcement, closed down 94.88 points at 10,470.

Mr. Jones said he now expects the funds rate could go as high as 3.75 percent by the end of the year, meaning one more quarter-point rate increase than he had been expecting before yesterday’s meeting. He said that 30-year mortgage rates, now near 6 percent, could be at 6.75 percent by year’s end, still low enough to keep the housing industry strong this year.

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