Federal Reserve policymakers as expected hiked interest rates another notch today as nation’s central bank pursues a strategy to wean the economy off cheap money without stifling growth.
The Fed’s Federal Open Market Committee, headed by Fed Chairman Alan Greenspan, raised its benchmark federal funds rate- the rate on overnight loans between banks — to 2% from 1.75% It was the fourth 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.
Fed policymakers, in a statement that is scrutinized by investors and analysts, repeated previous remarks that the relatively low rates combined with “robust” growth in productivity, is “providing ongoing support to economic activity.”
Despite a spike in energy prices, economic output “appears to be growing at a moderate pace” and labor market conditions “have improved,” the Fed said. Price inflation remained “well contained.”
Many economic observers said the Fed’s decision and statement left little doubt it will raise rates by another quarter-point when the policymakers gather again Dec. 14.
“The Fed is clearly less worried than ourselves about the potential impact of energy costs and weaker labor market indicators like help wanted” advertising, said economist Ian Shepherdson in a research note for the consulting firm High Frequency Economics. “We now have to expect a Dec. hike.”
For months, 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.
Many economists estimate the Fed will eventually push rates up between 3.5% and 4.5%. But some predict that the Fed will temporarily halt its upward march at about 2% to assess what effect higher interest rates, high oil prices and other negative factors are having on the economy.
There are many economists who worry if 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 Federal 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 September narrowed 3.7% from the previous month. The decline was larger than most analysts had expected and was driven by a surge in exports and a drop in imports, primarily crude oil.
Also, the Labor Department said that weekly jobless claims rose 2,000 to a seasonally adjusted, annual rate of 333,000 for the week ended Nov. 6.
Times Staff Writer Warren Vieth contributed to this story.