Fed Lifts Benchmark Interest Rate to 3.25%

The economy grew at a brisk 3.8 percent annual rate in the first three months of the year, the same pace as the previous quarter, even as the price of U.S. benchmark crude oil rose above $55 a barrel.

Even after oil prices topped $60 a barrel on Monday, many analysts forecast that the economy will expand by about 3.5 percent this year -- an above-average pace that should prompt employers to keep adding jobs.

But oil prices remain a wild card in the forecasts -- and in the Fed's calculations.

Consumer spending has swung up and down over the past year, as oil and gasoline prices have fluctuated. Higher energy costs leave households with less cash to spend on other items and cut into businesses' profits unless they are passed on through higher prices.

More recently, signs of weak consumer spending had encouraged some analysts to think the Fed might be nearing an end to its series of rate increases. For example, personal spending was flat in May after rising just 0.2 percent in April, after adjusting for inflation, the Commerce Department reported yesterday.

Household spending appeared to rebound in June, though the official figures will not be available for a few weeks. But gasoline prices climbed last month, which could dampen spending in July.

The national average price for regular gas was $2.22 a gallon yesterday, higher than a month earlier but down from a high of $2.28 on April 11, according to the AAA auto club.

Even so, Fed officials yesterday showed no worries about an economic slowdown and gave no sign they are close to finishing the job of raising interest rates.

Federal Reserve Board Chairman Alan Greenspan and others have said they want to move the federal funds rate to a neutral level that would neither spur nor slow economic growth. But Fed officials have not decided what that rate might be, agreeing only that it varies with economic conditions. Greenspan has declined to estimate the number, saying only that he'll know when he gets there because he'll see greater "balance" in the economy.

Other Fed officials and staff members have estimated that the neutral rate lies between 3.5 and 5.5 percent. Some central bank policymakers have argued that the neutral rate may lie near the low end of the range these days because the burgeoning trade deficit is exerting a heavy drag on economic growth. But others think it lies higher and are willing to overshoot if necessary to ensure inflation remains under control.

Consumer prices rose 2.2 percent in the 12 months that ended in May, according to a Commerce Department price index released yesterday.

Prices for items other than food and energy rose just 1.6 percent in the 12 months that ended in May -- well within the Fed's comfort zone -- according to the department's "core" price index, a measure preferred by Fed policymakers.

Fed officials also noted in their statement, reassuringly, that "longer-term inflation expectations remain well-contained."