Predicting Growth, Fed Lifts Key Rate

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 yesterday that the recent "softness likely owes importantly to the substantial rise in energy prices."

The economy grew at a 3 percent annual rate in the April-through-June quarter, the slowest pace in more than a year and well below the 4.5 percent of the first three months of the year.

Meanwhile, job growth slowed dramatically in the second quarter, with employers adding just 78,000 jobs in June and 32,000 in July -- such small gains that statisticians view the totals as essentially unchanged.

Although oil prices had receded somewhat from their highs in May, they climbed to new records in the last week on fears of global supply disruptions. Light crude scheduled for September delivery rose above $45 a barrel during trading yesterday, before closing at $44.52 on the New York Mercantile Exchange.

The recent surge has renewed concerns that energy costs may continue to sap consumer spending and the economy's overall strength. But if oil prices stabilize, those effects should dissipate, said Mickey D. Levy, chief economist for Bank of America.

The Fed's action "wisely" shows it "is distinguishing between transitory factors and the underlying trends," Levy said.

Critics challenged the Fed action from both sides, with some saying it should not have raised rates, and others saying it is lifting them too slowly.

"The softness in the economy isn't mostly about oil," said Jared Bernstein, senior economist at the Economic Policy Institute, a think tank that focuses on labor issues. "It's as much about the weakening labor market, and raising rates is precisely the wrong medicine for that problem."