Fed Hikes Key Interest Rate

INTEREST RATES UP: 2004/6/30 Up arrow with hands counting money
AP
The Federal Reserve boosted a key short-term interest rate by one-quarter percentage point Wednesday, the fourth increase this year.

It's part of a credit tightening campaign to bring rates back up to more normal levels now that the economy's recovery from the 2001 recession is more deeply rooted.

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 percent from 1.75 percent.

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

"I don't think there are any surprises whatsoever here," Joshua Shapiro, chief U.S. economist for MFR Inc., told CBS Marketwatch. Shapiro expects the Fed to approve a fifth rate hike in December.

Shapiro's opinion was echoed by a Wall Street professional.

"It was exactly as expected, basically a repeat of the statement they made last time," said Jim Awad, chairman of Awad Asset Management. "The economy remains strong, the labor market's improved, inflation expectations remain contained."

As a result of the Fed's decision to push up the funds rate, commercial bank were expected to increase by a corresponding amount their prime lending rate for many short-term consumer and business loans to 5 percent from 4.75 percent.

The Fed's current rate-raising campaign began in June with a quarter-point boost, marking the first rate increase in four years. The Fed bumped up rates again by a quarter-point in August and September and then once more on Wednesday.

Fed policy-makers stuck to their view that future rate increases would be gradual. They said rates could go up at a pace likely to be "measured," retaining language contained in previous statements.

On the economy, the Fed said that it "appears to be growing at a moderate pace despite the rise in energy prices and labor market conditions have improved."

The Fed also said that inflation and longer-term inflation expectations "remain well contained," another reason why the Fed can stick with its gradual approach to raising rates.

The vote was unanimous.

The Fed's action was widely anticipated. Every economist surveyed by CBS MarketWatch predicted the increase that was approved Wednesday.