Fed Raises Interest Rate To 3%

(CBS/AP)  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 on Tuesday.

The move, which had been widely expected by financial markets, pushed the federal funds rate up to 3 percent. It was 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 retained 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.

CBS News Correspondent Howard Arenstein reports that the fed says inflation can be kept in check so it expects that it will be able to continue raising rates at what it calls a measured pace. The fed also blames higher energy prices on slowed spending.

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."

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.

It was widely expected that faced with those conflicting forces, the Fed would stay the course, raising interest rates by another moderate quater-point in an effort to keep inflation pressures from this year's spurt in oil prices from spilling into other sectors of the economy.

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 was expected to trigger a corresponding quarter-point increase in banks' prime lending rate, the benchmark for millions of business and consumer loans. The prime rate now stands at 5.75 percent.

"There is certainly not going to be any surprise in their action. Every indication is that the Fed will hike the federal funds target by another quarter-point," said David Jones, head of DMJ Advisors.

The steady-as-she-goes prediction is 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.

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