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Fed Raises Key Interest Rate by Quarter-Point

By Nell Henderson
Washington Post Staff Writer
Tuesday, August 10, 2004; 5:15 PM

Federal Reserve officials raised a key short-term interest rate today, indicating that they expect the economy to regain momentum in the months ahead.

Fed policymakers, in a statement issued after their meeting, blamed high energy prices for the recent sharp slow-down in economic growth and job gains. But they made clear they view the "softness" as temporary and believe they can likely stick to their plan of lifting rates gradually as the expansion continues.

_____Live Online_____
Transcript: Jared Bernstein, senior economist at the Economic Policy Institute, discusses the Federal Reserve decision on interest rates, unemployment, stocks and oil prices.
_____On the Web_____
Federal Reserve Open Market Committee Statement (August 10, 2004)
_____Video_____
The Post's Nell Henderson discusses the Fed decision.

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Graphic: Historical Changes in the Federal Funds Rate
In His Own Words: Greenspan comments and Fed actions since 2001.
Timeline: Interest rate changes since the recession of 1990.
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The economy "appears poised to resume a stronger pace of expansion going forward," the Federal Open Market Committee, the central bank's top policymaking group, said in the statement.

Fed officials agreed unanimously to nudge their federal funds rate, the interest rate charged between banks on overnight loans, to 1.50 percent from 1.25 percent. The rate influences many other business and household borrowing costs throughout the economy.

Banks responded to the Fed announcement by raising their prime lending rate for business loans to 4.50 percent from 4.25 percent. That means consumer rates that are tied to the prime, such as many home-equity loans and credit cards, will likely rise by as much.

But rates are still so low by historical standards that they should continue to stimulate economic growth by encouraging borrowers to take on more debt. The central bank did not raise rates to slow the economy, but rather to ensure that inflation pressures do not build up. Lifting it by a small amount at this point is more like easing up on the economy's accelerator than like tapping on the brake.

Stock prices rallied, as investors were more heartened by the Fed's optimistic outlook than they were worried that higher rates will slow growth. Bond prices fell, since higher rates on new debt issues will erode the value of existing bonds carrying lower rates.

The Fed's message "is they still view the pause we've seen recently as temporary," said Lynn Reaser, chief economist for Banc of America Capital Management. "The inference is that oil prices are unlikely to continue to rise at the pace we've seen."

Reaser said she agrees with the Fed's analysis but added that oil "remains a risk" to the forecast.

The Fed committee said today that the recent "softness likely owes importantly to the substantial rise in energy prices."


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