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Fed Again Increases Key Rate By 0.25%

But it also repeated language emphasizing its readiness to raise rates more aggressively if inflationary pressures build further or to move more gently if the economy loses steam.

That means financial markets are right to expect the Fed to raise the rate by a quarter of a percentage point at each of its upcoming meetings scheduled in May, June, August and September, to 3.75 percent by fall, Ruskin said. He also predicts the rate will be at 4 percent by year-end, just as Fed Chairman Alan Greenspan is preparing to step down from the job he has held since 1987.

The Washington Post's Nell Henderson discusses the Fed's quarter-point interest hike.
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"It's steady as she goes," said Richard A. Yamarone, director of economic research at Argus Research Corp., a financial advisory firm, referring to the prospect of a continuing series of Fed increases.

The Fed's statement is more a "reality check," acknowledging the fact of rising inflationary pressures, than a change of policy approach, Yamarone said.

One source of those pressures is the economy's rapid rate of growth so far this year.

Many forecasters had predicted the economy would cool after expanding 4.4 percent last year, restraining price increases. Instead, the housing market continues to boom, retailers are ringing up healthy sales, and businesses are hiring and investing more.

Macroeconomic Advisers LLC, a St. Louis forecasting firm, estimates the economy is growing at about a 4.5 percent annual rate in the January-through-March quarter -- much faster than the 3.8 percent pace of the final quarter of last year.

One spur to growth has been the persistence of generally low interest rates in recent months, despite the Fed's actions. Mortgage rates, for example, remain lower than they were last spring and summer, according to Freddie Mac, the mortgage financier.

The rate for a 30-year fixed mortgage averaged 5.95 percent in the week ended March 17, compared with averages above 6 percent in May, June and July. With the Fed likely to continue raising its rate, Freddie Mac is forecasting the 30-year mortgage rate to be about 6.25 percent by year-end.

The federal funds rate, the interest rate charged on overnight loans between banks, influences many other rates throughout the economy. Major banks responded to the Fed's action by raising their prime rate on business loans by a similar quarter of a percentage point, to 5.75 percent from 5.5 percent. Consumer borrowing rates tied to the prime, such as on many credit cards and home equity loans, may rise as well.

One of the biggest sources of inflationary pressures is the recent jump in oil, gasoline and heating oil prices. But higher energy costs also threaten to slow economic growth by leaving households with less money to spend on other goods and services.

Consumer spending dropped sharply last summer after the national average for regular gasoline rose above $2 a gallon. The price fell back for several months but has surged in recent weeks and hit $2.10 a gallon yesterday, according to the AAA auto club. The Energy Department has forecast it to climb to about $2.15 a gallon in coming weeks.

After adjusting for inflation, however, gasoline prices remain well below the record high reached in March 1981, which would be an average of $3.08 for a gallon of regular in yesterday's dollars, according to the Energy Department.

Much of the rise in gas prices is being driven by higher oil prices, which have topped $56 a barrel for U.S. benchmark crude in recent days.

"Markets must now come to terms with the possibility that at some point in the future the Fed may need to exercise its option to accelerate the pace of rate hikes," said Nicolas Checa, a managing director at Kissinger McLarty Associates, an international advisory firm. "At the same time, one should not conclude that that option is destined to be exercised immediately."

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