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Fed Increases Short Term Rate, Indicates No More 1999 Raises

By John M. Berry

The Federal Reserve, concerned that the U.S. economy is still growing too fast for inflation to stay low, Tuesday raised its target for overnight interest rates by a quarter-percentage point to 5.25 percent. But Fed officials also signaled that they are not likely to raise rates again between now and the end of the year.

The action followed a similar quarter-point increase at the end of June and was widely anticipated by investors and financial analysts. However they were uncertain before the meeting over whether Fed policymakers were likely to raise rates a third time this year, at their next meeting in October. The wording of the announcement by the policymaking group, the Federal Open Market Committee, made it clear they are not.

“Today’s increase... together with the policy action in June and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish of the rise of rising inflation going forward,” the announcement said.

The statement added that the policy directive adopted by the FOMC was “symmetrical,” which means the group made no presumption about whether its next policy move would be a rate increase or a rate cut.

The Fed action affected the federal funds rate, the interest rate financial institutions charge each other on overnight loans. But millions of consumers and businesses are likely to see their borrowing costs rise quickly as banks follow by boosting their prime lending rate by a similar quarter point, to 8.25 percent from 8 percent. The prime rate is a key benchmark for the rates charged on a many types of lending, including credit-card balances, home-equity loans, some personal loans and a variety of business loans.

That increase in borrowing costs would be expected to dampen consumer and business spending, and thus slow the nation’s economic growth.

Fed Chairman Alan Greenspan and other policymakers have acknowledged that there are few, if any, signs that inflation pressures are about to get worse. But with the nation’s unemployment rate at 4.3 percent, near a three-decade low, and spending by both businesses and consumers increasing rapidly, the officials fear that eventually the combination of tight labor markets and strong economic growth will cause inflation to accelerate.

However, a number of Fed officials believe growth is slowing enough that, with the further restraint from somewhat higher interest rates, it will gradually drop to a pace less likely to spur inflation.