- The Washington Times - Tuesday, May 3, 2005


The Federal Reserve, caught between a sudden economic slowdown and heightened worries about inflation, decided to nudge a key interest rate up by another quarter-point yesterday.

The move, which had been widely expected by financial markets, pushed the federal funds rate up to 3 percent. It marked the eighth increase in the interest that banks charge each other on overnight loans since the central bank began its credit-tightening campaign last June.

The Fed also kept a promise it has been making for the past year to move rates up “at a pace that is likely to be measured,” a phrase that markets have interpreted as signaling continued small quarter-point rate increases.

The decision by Federal Reserve Chairman Alan Greenspan and his colleagues came as the central bank is being buffeted by strong economic crosscurrents — rising inflation pressures on one hand and a sudden slowing in economic growth on the other.

Noting the recent slowdown, the Fed in its statement said, “Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.”

The Fed also noted rising prices, saying, “Pressures on inflation have picked up in recent months and pricing power is more evident.”

David Jones, chief economist at DMJ Advisors, said Fed officials apparently think that “the pickup in inflation pressures and the slowing in the economy are transitory.”

Mr. Jones predicted the central bank would boost rates at its next meeting June 29-30 by another quarter point and keep raising rates at least through the summer.

When the Fed started boosting rates 10 months ago, the funds rate stood at 1 percent, the lowest level in 46 years.

The increase in the funds rate triggered a corresponding quarter-point increase in commercial banks’ prime lending rate, to 6 percent from 5.75 percent.

The steady-as-she-goes outcome of yesterday’s meeting was a far cry from the expectations about the Fed’s next moves that were being made immediately after its last meeting on March 22.

At that time, Wall Street began bracing for the Fed to ditch the promise to be measured and jack up rates by a half-point. That fear of more aggressive Fed credit-tightening was fanned by a change of wording in the March Fed statement to acknowledge more worries about inflation.

Since then, however, various indicators showed the economy slowing sharply in March.

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