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Fed Again Increases Key Rate By 0.25%

Policymakers Pin 7th Hike Since June on Inflationary Pressures

By Nell Henderson
Washington Post Staff Writer
Wednesday, March 23, 2005; Page E01

The Federal Reserve, noting rising price pressures, nudged up its key short-term interest rate yesterday for the seventh time since June and signaled it will keep raising it in coming months to prevent inflation from taking off.

Fed policymakers unanimously agreed to raise the benchmark federal funds rate to 2.75 percent from 2.5 percent. They have lifted the rate by a quarter of a percentage point at each of their last seven meetings, from 1 percent in June.

The Washington Post's Nell Henderson discusses the Fed's quarter-point interest hike.
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Stock prices tumbled and Treasury yields jumped after the central bank's top policymaking committee announced its action and released a statement interpreted by many analysts as a warning that interest rates might rise more sharply and quickly than they had anticipated.

"Pressures on inflation have picked up in recent months and pricing power is more evident," the statement said, referring to rising costs for energy, materials and employee benefits and the ability of more businesses to raise consumer prices.

Prices paid by businesses to producers of finished goods rose 0.4 percent overall in February, largely reflecting a 1.4 percent rise in energy prices and a 0.8 percent increase in food prices, the Labor Department reported.

The producer price index rose 4.7 percent in the 12 months ended in February, fueling some concern in financial markets that businesses will eventually raise consumer prices across the board.

So far, higher oil and gasoline costs have not resulted in "notably" higher consumer prices for items other than food and energy, the Fed noted. Such "core" prices rose just 1.6 percent in the 12 months that ended in January -- well within the Fed's comfort zone -- according to the committee's preferred measure.

But the policymakers' statement "says pretty clearly that they are more worried about inflation," said Alan Ruskin, an economist with 4Cast, an economics consulting firm.

Even so, the Fed did not indicate it plans to start raising rates in bigger or more frequent moves. On the contrary, the statement repeated that officials expect to continue lifting the benchmark rate at a "measured" pace, which has come to mean a quarter-point increase at every scheduled committee meeting.

The committee said that it believes the inflation risks can be controlled with interest rate increases, or "appropriate monetary policy action," and that it expects core inflation to remain "contained."

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