Fed Raises Key Interest Rate by Quarter-Point
Policymakers Boost Rates for First Time in 4 Years
By Nell Henderson
Washington Post Staff Writer
Wednesday, June 30, 2004; 3:26 PM
Federal Reserve officials today raised a key short-term interest rate for the first time in four years and signaled that they will keep moving it up in coming months as aggressively as necessary to keep inflation under control.
Fed policymakers concluded a two-day meeting by lifting their target for the Federal funds rate to 1.25 percent from 1 percent, where it had been for the last year.
The officials, in a statement issued after the meeting, acknowledged that inflation had picked up recently but attributed part of that trend to temporary factors. They also said that they expect "underlying inflation," which excludes volatile food and energy prices, to remain "relatively low."
Thus if inflation remains tame, the Fed can raise its target "at a pace that is likely to be measured," said the statement issued by the Fed's top policymaking committee, repeating a phrase that has implied small rate increases -- of a quarter-percentage point at a time -- spread over many months.
But the committee also emphasized that it is prepared to abandon that plan if its forecasts prove wrong, saying it "will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
The statement effectively warned financial markets that the Fed was making no promises about the path of interest rates, and that it must have flexibility to respond appropriately to changing conditions in an economy still in transition from a wobbly recovery to a sustained expansion.
If inflation pressures persist, the committee is considered likely to raise rates more frequently, or in larger increments than implied by a "measured pace." Likewise, if economic growth falters and inflation falls to dangerously low levels, the committee could stop raising rates for a while, or even cut them in response to an economic shock, such as a stock market crash or terrorist attack.
Financial markets had little reaction to the Fed's action, reflecting the apparent success of the policymakers' recent efforts to telegraph their intentions and thinking. Stock and bond prices rose slightly after the statement was released.
Because Fed officials have signaled for weeks that they would start raising their rate target at a gradual pace, many borrowers are already paying higher rates on a variety of loans and likely will see rates continue to climb for a while.
The Fed funds rate, charged on overnight loans between banks, influences many other interest rates determined by banks and financial markets, such as those on mortgages, credit cards, home-equity loans and other forms of household and business borrowing.
© 2004 The Washington Post Company