Federal Reserve officials, expressing confidence Hurricane Katrina will cause no more than a temporary hit to the U.S. economy, raised their key...

Share story

WASHINGTON — Federal Reserve officials, expressing confidence Hurricane Katrina will cause no more than a temporary hit to the U.S. economy, raised their key short-term interest rate yesterday to make sure inflation stays under control.

In an unusually long and sympathetic statement released after their meeting, the Fed’s top policy-making group said, “The widespread devastation in the Gulf region … and the boost to energy prices” imply that national consumer spending, employment and overall economic growth “will be set back in the near term.”

But, they added, “while these unfortunate developments have increased uncertainty about near-term economic performance, it is the [Fed’s] view that they do not pose a more persistent threat.”

Rather, they said, low interest rates continue to stimulate growth, while “higher energy and other costs have the potential to add to inflation pressures.”

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks.

But the Federal Open Market Committee was more divided than it has been in more than two years.

Nine of the 10 voting members, including Chairman Alan Greenspan, agreed to raise their benchmark federalfunds rate to 3.75 percent from 3.5 percent.

But Fed board member Mark Olson voted against the move, saying he preferred to leave the rate unchanged. His was the panel’s first dissenting vote since June 2003.

More members came to the meeting open to Olson’s view. Only seven of the 12 regional Fed banks requested a similar quarter-percentage point increase in the largely symbolic discount rate to 4.75 percent, a sign that five banks would have been content with no increase in the funds rate either.

The committee made clear it plans to keep raising the rate in the months to come, repeating it believes it can do so gradually, “at a pace that is likely to be measured.”

The Fed’s action marked its 11th consecutive quarter-percentage point increase in the federal-funds rate, the overnight rate charged on loans between banks, since June 2004, when it was at a four-decade low of 1 percent.

Many investors and analysts have come to expect a “measured” pace to mean a quarter-percentage point increase at every scheduled Fed meeting. But Fed officials stress they could pause or boost the rate by as much as a half-percentage point at a time, depending on the economy’s behavior.

That leaves open the possibility they might leave the rate unchanged at the next meeting Nov. 1, if consumers and businesses pull back sharply in the weeks ahead. Or the group could raise the rate by a half-point if inflation takes off.

The federal-funds rate influences many borrowing costs throughout the economy.

Shortly after the Fed’s action yesterday, major banks raised their prime rate on business loans a similar quarter-percentage point, to 6.75 percent from 6.5 percent.

Many consumer rates, such as on credit cards and home-equity loans, may rise as well.

Banks and other financial institutions may increase the rates they pay on savers’ certificates of deposit and money-market funds.

Long-term rates, such as those charged on 30-year mortgages and on corporate debt, are determined by global markets. Those rates have remained low even as the Fed raised short-term rates.

For example, the fixed rate on a 30-year mortgage averaged 5.74 percent nationally last week, barely below the 5.75 percent of a year ago, according to mortgage-finance company Freddie Mac.

Fed officials stressed both their sympathy for Katrina’s victims and their upbeat belief the economy was in solid shape before the storm hit.

Consumers and businesses had been increasing their spending rapidly, and unemployment had fallen to a low 4.9 percent in August. The economy expanded at a solid 3.3 percent annual rate in the spring, the Commerce Department estimated.

The economy “appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina,” the Fed statement said.