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 today.
WASHINGTON — 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 today.
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.
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.
Noting the recent slowdown, 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.”
Wall Street, which had been in positive territory just before the Fed’s announcement, rose further with the Dow Jones industrial average up nearly 40 points in the first half-hour of trading after the Fed action. Investors were relieved that the Fed retained its promise to keep moving rates at a measured pace rather than moving to more aggressive half-point hikes because of rising inflation worries.
David Jones, chief economist at DMJ Advisors, said Fed officials apparently believe that “the pickup in inflation pressures and the slowing in the economy are transitory.”
Jones predicted the central bank would boost rates at its next meeting on June 29-30 by another quarter point and keep raising rates at least through the summer.
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.
The steady-as-she-goes outcome of today’s meeting was 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.
Since then, however, various indicators showed the economy slowing sharply in March. The government reported last week that this sudden slowdown had dragged down economic growth to a rate of just 3.1 percent in the first three months of the year, the slowest pace in two years.
That slowdown, however, eased fears for the time being about the Fed becoming more aggressive in its rate hikes. Analysts, however, are not looking for a pause in the gradual quarter-point increases because various inflation statistics are continuing to flash some warning signals.
Consumer prices jumped 0.6 percent, reflecting the surge in energy costs, but even outside of volatile food and energy, the so-called core rate of inflation was up 0.4 percent in March, the biggest jump in 21/2 years.
Many economists believe the Fed will keep raising the funds rate for the rest of the year with more quarter-point moves until it reaches a “neutral” point for the funds rate, the level where the rate is neither stimulating economic growth or depressing growth.
The Fed has never said exactly where neutral is but many economists believe it could be around 4.25 percent, the level the funds rate would be in December if the Fed kept boosting rates by a quarter point at each meeting.