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Interest Rates Take A Hike – Again

The Federal Reserve boosted a key short-term interest rate by one-quarter percentage point Tuesday, marking the third increase this year. It's part of a gradual process to wean the economy from extraordinarily low rates that are no longer viewed as necessary to keep the economy afloat.

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 1.75 percent, from 1.50 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.

As a result of the Fed's decision to push up the funds rate, commercial banks were expected to increase by a corresponding amount their prime lending rate for many short-term consumer and business loans to 4.75 percent, from 4.50 percent.

The Fed's rate-raising campaign began in June when the central bank ordered its first rate increase in four years. That was followed by a rate increase in August and then by another on Tuesday.

Fed policy-makers stuck to their view that future rate increase would be gradual. It said rates could be raised at "a pace that is likely to be measured" given that inflation is expected to remain relatively low.

On the economy, the Fed said the economic growth "appears to have regained some traction" and "labor market conditions have improved modestly."

Despite the rise in energy prices, inflation has eased in recent months, the Fed added.

The vote was unanimous.

The Fed's rate increase comes with Election Day just six weeks away. President Bush and his Democratic rival, John Kerry, hold widely divergent views of how the economy and the nation's job market are faring.

Incumbent politicians normally are unhappy if the Fed raises interest rates close to an election. Yet, some economists said that by raising rates, the Fed could be viewed as appearing comfortable about the pace of the economy's expansion, which could be seen as good for the Bush campaign.

Greenspan, appearing before Congress this month, said the economy has "regained some traction" after hitting a "soft patch" in the late spring. He blamed much of that softness on soaring energy prices.

Housing construction climbed in August to an annual rate of 2 million units, the highest since March, the Commerce Department reported Tuesday.

Companies, meanwhile, stepped up hiring in August, adding 144,000 jobs, the most since May. Still, the economy is down a net 913,000 jobs since Bush took office.

Private economists believe the economy, which grew at a 2.8 percent annual rate in the second quarter of this year, expanded at a 3 percent to 4 percent pace in the July-to-September quarter.

Even with the latest increases, both the funds rate and the prime rate still would be considered low by historical standards, analysts said.

Before the Fed ordered its first rate increase of the year in June, the funds rate had been kept for a year at 1 percent, a 46-year low, to help support the economy.

A series of 13 rate reductions that began in January 2001 and ended in June 2003 left the funds rate at the 1 percent level. During that period, the Fed battled to help an economy staggered by a series of blows from a plunging stock market and the 2001 recession to terrorist attacks and two wars.

Analysts believe the funds rate will rise to 2 percent by the end of this year. Economists, however, have mixed opinions on how additional rate increases will unfold after Tuesday's meeting. Some believe the Fed will boost rates again at its Nov. 10 meeting, then stand pat Dec. 14, its last meeting of the year. Others believe the Fed might take a breather at the November meeting but raise rates in December.