Fed increases key rate again despite Katrina

WASHINGTON - The Federal Reserve on Tuesday boosted a key interest rate for the 11th straight time and signaled that more rate increases were likely even as the country recovers from the devastating effects of Hurricane Katrina.

The action pushed the Fed's target for the federal funds rate - the interest that banks charge each other- to 3.75 percent. That's the highest level since summer 2001.

The Fed's rate increase spurred commercial banks to raise their prime rate by a quarter-point. That pushed the prime, the benchmark for millions of consumer and business loans, to 6.75 percent, its highest point in more than four years. Some economists had believed that Katrina, the country's costliest natural disaster, might prompt the Fed to temporarily pause in its campaign to drive interest rates higher to keep inflation in check.

However, Federal Reserve Chairman Alan Greenspan and his colleagues said Katrina's impact on the overall economy was likely to be short-lived.

In a brief statement explaining the action, the Fed said all the problems from Katrina "will be a setback in the near term" for the economy. However, it said it did not foresee Katrina posing a "more persistent threat" and therefore believed it needed to continue raising interest rates to guard against inflation.

The Fed indicated it was more concerned that inflation pressures could intensify from the increase in energy prices that has occurred this year, including a surge after Hurricane Katrina shut down production along the Gulf Coast.

"Higher energy and other costs have the potential to add to inflation pressures," the central bank said in its statement.