Fed Reserve raises rates for sixth time
(Agencies)
Updated: 2005-02-03 09:18

The U.S. Federal Reserve on Wednesday raised interest rates for a sixth straight time, extending a policy of gradually lifting borrowing costs to levels high enough to ward off inflation pressures.

The unanimous decision by the U.S. central bank's policy-setting Federal Open Market Committee moves the target for the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 2.5 percent.

The U.S. Federal Reserve on February 2, 2005 raised interest rates for a sixth straight time, extending a policy of gradually lifting borrowing costs to levels high enough to ward off inflation pressures. The unanimous decision by the U.S. central bank's policy-setting Federal Open Market Committee moves the target for the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 2.5 percent. [Reuters]

In a statement after a two-day meeting, Fed officials retained an assessment that economic risks were balanced between slower growth and rising prices and said they thought they could keep raising rates at a "measured" pace.

A poll of 19 Wall Street primary dealers, conducted after the Fed statement was published, found them unanimously predicting another quarter percentage point rate hike at the next FOMC meeting on March 22. Eighteen foresaw an additional incremental rate rise at the following session on May 3.

The central bank's wording on the economy all but mirrored the statement it issued at its last policy meeting on Dec. 14.

"Output appears to be growing at a moderate pace, despite the rise in energy prices and labor market conditions continue to improve gradually," the Fed said in the statement outlining its rate decision, which also increased the largely symbolic discount rate a matching amount to 3.5 percent.

SAVING AMMUNITION

The Fed action comes two weeks before Fed Chairman Alan Greenspan's testimony on the economy on Feb. 16-17 to Senate and U.S. House of Representatives panels, respectively. Analysts said that was likely one reason the statement and the meeting outcome were so predictable.

The U.S. Federal Reserve on February 2, 2005 raised interest rates for a sixth straight time, extending a policy of gradually lifting borrowing costs to levels high enough to ward off inflation pressures. The unanimous decision by the U.S. central bank's policy-setting Federal Open Market Committee moves the target for the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 2.5 percent. Fed Chairman Alan Greenspan is shown testifying on Capitol Hill in this file photo. [Reuters]

"I don't think they would have wanted to pre-empt anything before then," said John Daw, a currency strategist with Merrill Lynch in New York. "They can talk about changes then rather than have speculation build up prior to then."

The FOMC held a discussion about a numerical target for inflation -- a practice Greenspan has resisted during his 18-year tenure but that many other central banks use. With Greenspan scheduled to retire next year, the topic may gain momentum and draw questions from lawmakers about whether it might be useful for the United States to consider moving to such a system under a new Fed leader.

The FOMC's discussion on this will probably stay under wraps until the release of the meeting minutes on Feb. 23.

Financial markets were unfazed by the rate decision, having fully anticipated it. The Dow Jones industrial average closed up 44.85 points, or 0.4 percent, at 10,596.79 while the high-tech laden Nasdaq Composite Index advanced 6.36 points, or 0.3 percent, to 2,075.06.

Prices for 30-year U.S. Treasury bonds gained 9/32 of a point to yield 4.58 percent while bellwether 10-year notes were virtually unchanged. The dollar pared gains to end little changed against other currencies, as traders apparently wished for a more aggressive Fed stance with bigger rate rises.

The cost of loans between banks is still low by historic standards but above the 1 percent starting point for the Fed's latest rate-rise campaign.

Policy-makers began boosting rates in June, confident the economy was in a sustainable expansion more in need of higher rates to avert inflation than the stimulus of cheap credit.

COMFORT ZONE

Economist Parul Jain of Nomura Securities in New York said the Fed's choice of such similar language in December and February signaled its satisfaction the economy was on a good track.

"That is what the Fed wanted to relay, that it is comfortable with the data that have come out -- the economy looks pretty strong and inflation looks very well-contained, despite the rise in energy prices," he said. "So clearly there is a high degree of comfort with the economy's evolution."

Since the downturn of 2001, the U.S. economy has grown steadily, and the Fed's 13 interest-rate cuts are at least partly responsible for helping it survive the impact of the attacks of Sept. 11, 2001, and a rain of other blows including corporate scandals.

The most recent data on gross domestic product showed a 3.1 percent annual rate of economic growth in last year's fourth quarter but that number may have been understated because of an error by Canadian officials on trade data.

Most recent U.S. economic reports have implied continued expansion.

Personal income surged a record 3.7 percent in December helped by a big dividend payout by software giant Microsoft Corp. and spending rose solidly, a tonic for the economy at the beginning of 2005.

Job growth, while steady, has not been robust and some economists have suggested this might lead the Fed to rethink rate rises in the months ahead.

One potential negative for the outlook is lofty oil prices, which topped $55 a barrel last year and were trading near an expensive $47 Wednesday.

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