Higher Rate Doesn't Mean Much Higher

Fed Action Viewed As Slight Adjustment

Even if Federal Reserve officials announce today, as appears likely, that they are beginning to nudge up interest rates, it won't mean the days of easy money are over.

Short-term rates will still be near rock-bottom, and Fed officials have not indicated any desire to move them up high enough to slow economic growth.

"They've got a long way to go," before the Fed's benchmark overnight rate would be at a "neutral" level that would neither spur nor slow growth, said Mickey D. Levy, chief economist at the Bank of America.

A neutral rate would be 3.5 percent to 4.5 percent, given the low rate of inflation, demand for credit, the government's tax and spending policies and other factors, economists estimate. Since Chairman Alan Greenspan and other Fed officials have said repeatedly that they hope to raise rates at a "measured" pace, it could take several months, if not years, to get to that neutral rate.

Fed officials plan to announce their rate decision this afternoon at the conclusion of a two-day meeting.

Long-term interest rates for many forms of consumer and business borrowing have increased in anticipation of today's Fed action, but they are still relatively low and likely to remain so for some time, many economists believe.

Wall Street analysts widely expect the Fed to raise its benchmark federal funds rate to 1.25 percent from the current 1 percent, the lowest since 1958. At 1.25 percent, the rate should still stimulate economic growth, economists say, but slightly more lightly.

Thus, the Fed action would be more like easing a little on the economy's accelerator than tapping on the brakes.

"It doesn't materially change the after-tax costs of mortgages. Households can still borrow at very favorable rates. Businesses' cost of capital is still low. And the Fed is still pumping in money," Levy said. "Not much will have changed."

The Fed funds rate, charged between banks on overnight loans, affects the economy because it influences the many other rates charged by banks and determined by financial markets, such as those on mortgages, home equity loans, credit cards and other forms of consumer and business borrowing.