Fed Hikes Interest Rate

The Federal Reserve, still concerned about inflation, raised a key interest rate on Tuesday to the highest level in more than four years and signaled more increases are likely.

The Fed announced it was pushing its target for the federal funds rate, the interest that banks charge each other, to 4 percent from 3.75 percent, where it had been since the Fed's last interest-rate meeting on Sept. 20.

It marked the 12th consecutive quarter-point increase since the Fed began gradually raising rates in June 2004 to make sure that a growing economy did not generate higher inflation.

Higher interest rates fight inflation by slowing economic activity. The higher rates dampen demand for such items as autos and homes.

In a brief statement explaining Tuesday's action, the Fed retained language it has been using, which said it believes future interest rates can occur "at a pace that is likely to be measured." That phrase is seen as a signal that the Fed plans to keep raising rates at a gradual pace of quarter-point moves at coming meetings.

Tuesday's rate hike had been widely expected, given that a number of Fed officials in recent weeks have expressed worries that the sharp rise in energy prices that occurred in early September presented the danger of more widespread inflation pressures down the road.

The Fed rate increase hike will mean increased borrowing costs for millions of Americans with commercial banks expected to follow the Fed's quarter-point rate hike with their own quarter-point increase in the prime lending rate, which currently stands at 6.75 percent.

Many analysts believe the Fed will keep raising interest rates at its final meeting of this year on Dec. 13 and at its first meeting of 2006, on Jan. 31.

Two more quarter-point increases would push the funds rate to 4.5 percent at the Jan. 31 meeting, which will be Federal Reserve Chairman Alan Greenspan's final meeting. He is stepping down with the end of his term on the board, concluding more than 18 years at the central bank.

President George W. Bush last week nominated Ben Bernanke his top White House economic adviser to succeed Greenspan. Bernanke has said that his "first priority" will be to maintain continuity with Greenspan's policies.

The Fed statement retained language used after the September meeting indicating that the central bank believed Hurricane Katrina would have only a temporary impact on economic growth, with greater concerns about what the hurricanes would do to energy prices, given the shutdowns of Gulf Coast production facilities.

"The cumulative rise in energy and other costs have the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained," the Fed said in its statement.

The increase pushed the funds rate to its highest level since it was at 4 percent in the summer of 2001, a time when the central bank was cutting interest rates to revive the economy.

The government reported last Friday that the overall economy grew at a solid annual rate of 3.8 percent in the July-September quarter. Private analysts said growth would have been well above 4 percent without the impact of the hurricanes.

People who know both Greenspan and Bernanke said Bernanke's pledge to follow Greenspan's policies is very credible when considering the close working relationship the two enjoyed when Bernanke served from 2002 to June of this year as a Fed board member.