Originally created 12/15/04

Fed boosts key interest rate to 2.25 percent



WASHINGTON - The Federal Reserve, encouraged by the economy's performance, boosted a key short-term interest rate by one-quarter percentage point Tuesday, the fifth increase this year. Fed policy-makers held the door open to further increases into 2005.

In their last regularly scheduled session for 2004, Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest rate policy in the United States - increased the target for the federal funds rate to 2.25 percent from 2 percent.

The funds rate - the interest banks charge each other on overnight loans - is the Fed's main tool for influencing economic activity.

The economy "appears to be growing at a moderate pace despite the earlier rise in energy prices and labor market conditions continue to improve gradually," the Fed said in a brief statement after the meeting.

The action means the funds rate has more than doubled from the 46-year low of 1 percent where it stood before the Fed embarked on its current string of rate increases in June.

As a result, Wells Fargo said it was increasing its prime lending rate to 5.25 percent from 5 percent. Other banks were expected to follow suit. The prime lending rate, the benchmark for many short-term consumer and business loans, moves in step with the funds rate.

The Fed's current rate-raising campaign began in June, when the central bank ordered its first rate increase in four years. Since then, it has boosted rates five times, with each move by a modest, one-quarter point.

Fed policy-makers on Tuesday stuck to their view that future rate increases would be gradual. The Fed said that rates can be raised "at a pace that is likely to be measured."

There are eight scheduled Fed meetings in 2005; the first is Feb. 1-2.

"They are not done," said Stuart Hoffman, chief economist at PNC Financial Services Group. "The Fed is steady as you go. It is doing exactly as expected and indicated more, measured, quarter-point rate hikes will come." Hoffman predicted another quarter-point boost at the February meeting.

On Wall Street, the Dow Jones industrials were up more than 50 points in trading after the Fed's afternoon announcement.

Tuesday's vote was unanimous.

Extra-low rates had been used as a tonic to help the economy recover from the 2001 recession.

Tuesday's increase is part of a process to move up the funds rate, which had been at extraordinarily low levels, to a more normal level now that the economy is on firm footing. Private economists say that low rates could sow the seeds of inflation down the road.

The Fed said that "inflation and longer-term inflation expectations remain well contained."

The pre-emptive increases should help protect the economy against a dangerous inflation flare-up, private economists said.

To further improve communications with Wall Street and Main Street, the Fed decided to speed up the release of minutes after each of its regularly scheduled eight meetings a year. It said it would release the minutes three weeks after the meetings, versus the current six to eight week lag.

The Fed's action comes as the economy continues to gain traction. The economy grew at an annual rate of 3.9 percent in the July-to-September quarter. Some analysts believe it is expanding at a slightly faster pace in the current October-to-December quarter.

Private economists are heartened that high energy prices haven't seriously sapped the spending of consumers, the economy's lifeblood.

A report, issued by the government Monday, revealed shoppers pushed up sales at the nation's retailers by a strong 0.8 percent in October and by 0.1 percent in November. People cut back on automobile purchases, but November's showing still was better than the flat performance analysts were forecasting.

Oil prices, which hit a record high of just over $55 a barrel in late October, have moderated. Prices are now hovering around $41 a barrel.

The job market, meanwhile, continues to recover. The economy added a net 112,000 jobs in November, down from 303,000 the previous month.

Adding jobs has been an important task for President Bush. But Democrats contend the president's economic policies have failed to produce a steady hiring stream of sufficient volume.

Federal Reserve boosts key interest rate

RATE INCREASE: The Federal Reserve boosted a key short-term interest rate by one-quarter percentage point Tuesday, the fifth increase this year - to 2.25 percent from 2 percent. The rate has more than doubled from the 46-year low of 1 percent before increases in June.

WHICH RATE: The funds rate is the interest banks charge each other on overnight loans and is the Fed's main tool for influencing economic activity.

WHAT'S NEXT: Fed policy-makers held the door open to further "measured" increases in 2005.