Fed Raises Key Rate to 2.25%
Federal Reserve policymakers today raised interest rates by another notch for the fifth consecutive time this year amid signs of a strengthening economy.
Wall Street stocks, which had traded in a narrow range this morning, rose modestly after the Fed announcement.
In a widely expected move, the Fed’s Federal Open Market Committee, headed by Fed Chairman Alan Greenspan, raised its benchmark rate on federal funds — overnight loans between banks — to 2.25% from 2.0%. It was fifth consecutive quarter-point increase since July.
In theory, increases in the federal funds rate will reverberate through the economy since so many lending rates on everything from credit cards, home equity loans and adjustable-rate mortgages are in some way linked to changes in the Fed’s benchmark rate.
The widely read remarks that accompanied the FOMC’s rate changed little from previous statements, noting that relatively low interest rates combined with “robust” increases in productivity “is providing support to economic activity.”
It noted that labor market conditions “continue to improve gradually” and that underlying price inflation is expected to remain “relatively low.”
For much of this year, the Fed has telegraphed its intention to raise rates “at a measured pace,” meaning in small increments, to keep prices from climbing as the economy continues to recover and demand for goods and services increases.
There are many economists who worry whether the higher rates will undermine consumer spending — the largest driver of economic growth — and the housing market, particularly in high-priced places like California.
Under Greenspan’s leadership, the Fed Reserve has steadily cut its rate from 6.5% in 2000 to 1% by last June to prop up an economy hit by tumbling stock prices, the 2001 terrorist attacks, corporate scandals and the Iraq war.
In other economic news today, the Commerce Department said that the nation’s trade deficit in October grew by nearly 9% to a record $55.5 billion from the previous month. The increase was larger than most analysts as a modest increase in exports was overwhelmed by a surge in imports. Notably, the nation’s trade deficits with OPEC and China hit record highs, according to economist Steven Wood at Insight Economics.
On the job front, a survey of employers showed that 24% of the companies planned to increase hiring during the first quarter of 2005. However, the survey of 16,000 companies by Manpower, an employment agency, also said that 10% of the firms expect to cut jobs and 59% planned no changes in hiring activity. Seven percent of the firms were unsure of their hiring plans.
