Fed raises US interest rate to 2.25% (Agencies) Updated: 2004-12-15 07:57
The Federal Reserve pushed U.S. interest rates up by a modest
quarter-percentage point on Tuesday and expressed confidence that inflation
could be kept at bay by slowly lifting credit costs from rock-bottom levels.
![The Federal Reserve raised U.S. interest rates on December 14, 2004 by a quarter-percentage point for the fifth time this year and said it will keep gradually lifting them from rock-bottom levels as the economy grows. The unanimous and widely expected decision by the central bank's policy-setting Federal Open Market Committee moves the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 2.25 percent from 2 percent. [Reuters]](xin_09120115080623107921.jpg) The Federal Reserve
raised U.S. interest rates on December 14, 2004 by a quarter-percentage
point for the fifth time this year and said it will keep gradually lifting
them from rock-bottom levels as the economy grows. The unanimous and
widely expected decision by the central bank's policy-setting Federal Open
Market Committee moves the benchmark federal funds rate -- which
affects credit costs throughout the economy -- to 2.25 percent from 2
percent. [Reuters] | The central bank's policy-setting Federal Open Market
Committee unanimously decided to raise the benchmark federal funds rate --
which affects borrowing costs throughout the economy -- by a quarter of a
percentage point to 2.25 percent.
It was the fifth straight increase this year.
The decision was widely expected and market reaction was limited. Still,
stocks gained, the dollar dipped and Treasury bond prices rose as the Fed failed
to show any discomfort with the inflation outlook as a few analysts had
expected.
"With underlying inflation expected to be relatively low, the committee
believes that policy accommodation can be removed at a pace that is likely to be
measured," the central bank said in a signal of a further gradual ratcheting up
of rates.
However, it repeated a pledge to respond to incoming data as necessary to
keep inflation in check.
While some economists wondered before the meeting whether the Fed might warn
of a heightened risk of price pressures and signal a willingness to step up rate
action, the central bank restated its view that risks to the economy were
balanced between inflation and renewed weakness.
"There's nothing in here to suggest that they're going to change from a
measured pace to be more aggressive," said Stuart Hoffman, chief economist at
PNC Financial Services Group.
![The Federal Reserve raised U.S. interest rates on December 14, 2004 by a quarter-percentage point to 2.25 percent, the fifth increase this year. Fed Chairman Alan Greenspan is shown testifying on Capitol Hill Feb. 25, 2004. [Reuters]](xin_09120115080635602332.jpg) The Federal
Reserve raised U.S. interest rates on December 14, 2004 by a
quarter-percentage point to 2.25 percent, the fifth increase this year.
Fed Chairman Alan Greenspan is shown testifying on Capitol Hill Feb. 25,
2004. [Reuters] | "On the other hand, there's also nothing in the statement to suggest that
they're ready to pause or stand pat," he said.
The vast majority of top Wall Street economists in a Reuters poll expect
another rate hike in February while 16 of 22 large firms surveyed see an
increase in March as well.
In the wake of the Fed's decision, several banks announced increases in prime
lending rates charged for loans to their best customers.
While prime rates are used as a benchmark for some loans, not all consumer
borrowing costs will necessarily rise. Mortgage rates, for example, are often
tied to yields on government bonds, which changed little on Tuesday.
UPWARD AND ONWARD
The Fed has raised rates a quarter-point at each of its last five meetings
and the central bank's statement bolstered expectations for further increases in
2005.
Markets have priced in a rate hike at the next gathering in early February
and see a likely boost to borrowing costs at the subsequent meeting in March as
well.
The Fed started on its "measured" increases in June, when rates stood at a
1958 low of 1 percent after 13 rate cuts to help the economy through the 2001
recession and a slow recovery.
Since that first rise in June, the post-meeting statements have changed
little.
On Tuesday, the Fed nodded to a recent easing in oil prices, which hit record
highs in late October, and a soft figure on job creation in November.
"Output 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.
The U.S. economy grew at a respectable 3.7 percent annual rate in the third
quarter and job gains have averaged 178,000 over the last three months -- not
spectacular but fast enough, analysts say, to whittle away at the unemployment
rate.
Economists say inflation risks will likely rise as the jobless rate, which
dipped last month to 5.4 percent, falls.
The Fed's preferred measure of core inflation -- a price index for personal
spending outside of volatile food and energy costs -- remains within the central
bank's comfort zone.
However, production costs are rising and another popular price gauge, the
Consumer Price Index, has been climbing even with food and energy costs stripped
out.
A drop in the dollar could also contribute to rising U.S. inflation pressures
as prices for imported goods rise.
The Fed's action on Tuesday moved the U.S. overnight rate a quarter-point
above official rates in the 12-nation euro zone, which may lend some support to
the beleaguered greenback by attracting yield-hungry investors.
Along with raising its target for the rate banks charge each other for
overnight loans, the Fed also hiked the largely symbolic discount rate, charged
for loans it makes directly to banks, by a quarter-point to 3.25 percent.
In addition, it revealed plans to speed up the release of minutes its policy
sessions, which could offer markets fresh insight into the thinking of
policy-makers.
In the past, FOMC minutes were released after the panel's subsequent meeting,
a lag of about six weeks. Now, the Fed said minutes will come out just three
weeks after each meeting.
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