Wall Street Saw It Coming

News of higher interest rates did not spook Wall Street investors Tuesday. A market-wide rally lifted stock prices after the Federal Reserve, as predicted, boosted rates a quarter-point.

The Dow Jones industrials gained 227 points as blue chips continued their powerful rise. The index closed at 10,907.

Advancing issues topped losers three to two, with more than 1 billion shares traded on the New York Stock Exchange.

Broader market averages also rallied. The Nasdaq composite rose 100 points to end at 4710. The Standard and Poor's 500 was 37 points higher at 1493.

Bidding for bonds edged prices up slightly, the yield on the Treasury Department's 30-year bond falling a smidgen (.006) to 5.90 percent.

The market's positive reaction stemmed from the nearly unanimous forecasts of the rate increase.

The Federal Reserve raised a key interest rate Tuesday by a quarter-point — the fifth increase since June — in an effort to slow the speeding economy and keep inflation from escalating.

The announcement came after a closed-door meeting of the Federal Reserve's Federal Open Market Committee, the officials who set interest rate policies.

The Fed said it was increasing its target for the federal funds rate, the interest that banks charge each other on overnight loans, to 6 percent from 5.75 percent.

The Fed also said future "risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

This statement does not guarantee that there will be future rate increases but it puts financial markets on notice that the Fed continues to be worried about inflation dangers.

Many economists are looking for at least two more rate increases — at the May 16 meeting and the June 28 meeting — pushing the funds rate up to 6.5 percent, the highest it has been since January 1991 when George Bush was in the White House.

After that, many analysts believe the central bank will sit back and watch how the economy reacts during the summer and fall presidential campaign.

The Fed Tuesday also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by a quarter-point to 5.50 percent from 5.25 percent.

In a statement explaining its decision, the Fed said it continues to remain concerned that the rapidly growing economy "could foster inflationary imbalances that would undermine the economy's record economic expansion."

The Fed's quarter-point increase in the funds rate was expected to be quickly followed by announcements from commercial banks that they were boosting their prime lending rate by a similar quarter point, from the current 8.75 percent to 9 percent.

The prime rate is a key benchmark for millions of loans, from home equity and credit card balances to short-term loans for small businesses.

In recent speeches, Federal Reerve Chairman Alan Greenspan, has raised new worries that too-rapid growth could derail the record-breaking economy, which entered 108 months of uninterrupted growth in March. Many economists took those remarks as a signal that higher interest rates would be forthcoming.

"Greenspan is behaving like a track coach," said Standard & Poor's DRI economist David Wyss. "He is telling us not to blow out. By running a smooth and steady pace, you can keep going a lot longer and a lot faster."

The economy grew by a breakneck 6.9 percent annual rate in the final three months of 1999 and many economists believe growth in the current quarter will come in around 5 percent, far above the 3.5 percent rate the Fed would like to see at this stage of the economic expansion.

The Fed has already raised rates four times in quarter-point steps, boosting the federal funds rate, the interest that banks charge each other, to 5.75 percent.

But, thus far, those higher rates have done little to either slow the economy or its main engine consumer spending, which accounts for two-thirds of all economic activity.

"It seems as though the economy has an incredible head of steam and the momentum just won't go away," said William Cheney, chief economist for John Hancock.

The stock market has been on a wild ride this year, with the Dow Jones Industrial Average posting huge declines from late January until last week, when it roared back to life with a 666-point gain for the week.

Thus far, even with robust growth, core inflation has remained tame. Prices at both the wholesale and consumer levels surged in February, but that was largely due to a big jump in energy prices.