Interest Rate Raised Again

By Jonathan Weisman and Jim VandeHei
Washington Post Staff Writers
Wednesday, August 10, 2005

For the 10th time in 15 months, Federal Reserve policymakers slightly boosted a key interest rate yesterday, adding its weight to data indicating robust economic growth and little inflation risk, despite surging energy prices.

The Federal Open Market Committee pushed the benchmark federal funds rate from 3.25 percent to 3.5 percent, the highest in almost four years. Fed policymakers say interest rates remain low enough to spur continued economic growth, which Wall Street analysts expect to exceed a 4 percent annual rate in the second half of the year.

But that pace has done little to assuage concerns in Washington that the economy's overall gains are not registering with much of the electorate. President Bush hinted at those concerns yesterday when he said rising energy and health care prices could dampen an otherwise solid economic outlook.

"Those are the two areas that we see as having a greater effect on . . . the future of economic growth," Bush said after meeting with his economic advisers on his ranch near Crawford, Tex.

Growth is being driven in part by factors that present longer-term risks. Interest rates remain low enough to allow people to borrow and spend. That has kept the nation's savings rate near zero, but it also has reduced pressure on employers to raise wages, which could fuel inflation. Cheap goods flooding in from abroad, especially from China, have kept shoppers busy, while compensating for climbing gasoline prices.

Foreign lenders have remained willing to finance the U.S. trade deficit and a federal budget deficit that, while receding, remains around $300 billion, 2.7 percent of the gross domestic product. Far from raising interest rates, the two deficits appear to have opened the door to foreign investment that has stoked business expansion and profits.

All that could change, said Richard Berner, chief U.S. economist for Morgan Stanley. "There are certainly abundant long-term challenges that sometimes have a way of telescoping into short-term shocks in the financial market," he said.

Bush had his eye on some of those issues yesterday when he said, "It's important for the American people to know we understand there are challenges and we're acting to meet them."

He said the energy bill he signed Monday will bring down energy costs in the long term. A top administration official, who spoke on the condition of anonymity because the discussions were private, said the White House is considering new health care proposals this year, perhaps as part of an overhaul of the tax code. Bush's tax reform panel is due to report its recommendations to Treasury Secretary John W. Snow by the end of September.

Ticking Up
The economy presents Bush with a predicament. By almost every measure, it has not only found its footing after a long, slow recovery from the 2001 recession but it also is gaining momentum.

Ben S. Bernanke, chairman of Bush's Council of Economic Advisers, said four key indicators have turned in "remarkable numbers": growth of the gross domestic product, 3.4 percent in the most recent quarter; payroll increases averaging 191,000 a month this year; "well contained" inflation outside the food and energy sectors; and productivity growth that has averaged 3.6 percent over the past four years.

But administration officials and some economists say there is a disconnection between those aggregate figures and the continuing misgivings of many Americans.

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