Fed Raises Rate as Its Chairman Bows Out

By Nell Henderson
Washington Post Staff Writer
Wednesday, February 1, 2006

Federal Reserve officials, after greeting Alan Greenspan with a standing ovation on his last day as their chairman, raised their benchmark short-term interest rate yesterday and signaled that they may nudge it higher in coming months to make sure brisk economic growth does not fuel higher inflation.

Shortly after the rate increase was announced, the Senate voted to confirm Ben S. Bernanke, 52, to be sworn in today as the central bank's 14th chairman. The White House has scheduled a private swearing-in ceremony for 9 a.m., the Fed said.

Greenspan, 79, steps down after more than 18 years in office, the second-longest tenure of any Fed chairman, after steering the U.S. economy through its longest expansion, two recessions, a stock market crash, international financial crises and terrorist attacks.

The Fed chief left his successor an economy growing at a healthy pace, with lower inflation and unemployment than when he took office in August 1987 under President Ronald Reagan.

"The expansion in economic activity appears solid," Greenspan and his colleagues said in a statement issued after they agreed unanimously to raise their benchmark rate to 4.5 percent from 4.25 percent.

Fed policymakers and senior staffers applauded Greenspan as he entered the meeting shortly after 9 a.m., continuing until he motioned with his hands for everyone to sit down, a central bank spokesman said later.

Greenspan received praise and gifts from his colleagues at a luncheon for about 180 Fed policymakers and senior staff members and was feted later at a reception for about 1,500 Fed employees.

"I know this institution will go on doing extraordinary things, and I will look on from the sidelines and cheer," he said at the lunch, according to the spokesman.

At the meeting before lunch, Greenspan presided as the Fed raised its benchmark federal funds rate, the overnight rate charged on loans between banks, for the 14th time since June 2004, when it stood at 1 percent. But that may not be enough to keep inflation pressures contained, the Fed's statement suggested.

"Some further policy firming may be needed," the statement said, indicating that at least one more rate increase might be in store. The language also left open the possibility that the group would leave the rate unchanged at its next meeting March 28, if inflation pressures abate.

Stock prices dropped after the decision was announced, reflecting some investors' disappointment that the Fed did not say it was done raising rates. But prices climbed back to close just slightly down.

The statement was the first in more than two years that did not indicate the Fed's likely next move, forcing financial markets to accept more uncertainty.

CONTINUED     1        >

© 2006 The Washington Post Company