Fed Raises Rate as Its Chairman Bows Out
Greenspan Gets Standing Ovation

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.

The federal funds rate influences many other borrowing costs in the economy. Major banks followed the Fed's action yesterday by lifting the prime rate on business loans to 7.5 percent from 7.25 percent. Many consumer rates, such as on credit cards and home equity loans linked to the prime rate, may rise as well.

Banks and other financial institutions may increase the rates they pay on certificates of deposit and money-market funds.

However, long-term interest rates such as those on mortgages and many business loans are determined by global financial markets and remain historically low.

Among Bernanke's first challenges will be to decide whether to continue raising the benchmark rate. Another is to forge a consensus of support for his position on the 19-member Federal Open Market Committee, the central bank's top policymaking group. And another is to decide what to say about the economy and interest rates in his first publicly scheduled testimony to Congress on Feb. 15.

Bernanke has met with the Fed staff recently to prepare his public presentation. A former Fed official and former chairman of the Princeton University economics department, he is a renowned expert on monetary policy and an experienced public speaker.

Although Bernanke has pledged to continue Greenspan's policies, he is likely to articulate more clearly than his predecessor how he will pursue them. He also may speak more openly about the risks to the economy and the Fed's possible responses.

Other Fed officials are undecided about whether to keep raising rates, saying that decision will depend on the behavior of the economy and inflationary pressures in coming weeks.

The economy slowed sharply in the final three months of last year, expanding at a weak 1.1 percent annual rate. But Fed officials and financial analysts think the economy is already regaining momentum and will expand by around 3.5 percent this year, which would match last year's solid rate.

However, inflation hit a five-year high of 3.4 percent last year, largely because of rising energy prices. Consumer prices outside of food and energy items remained tame. But with oil prices still high, Fed officials remain concerned that businesses will pass on more of their energy costs by raising other prices.

Fed officials also remain concerned that with unemployment at a low 4.9 percent, strong economic growth could help push up labor costs, adding to inflationary pressures.

Some Fed officials have worried about the possibility of raising their benchmark rate too high, which would slow the economy more than desired. But others have compared inflation to an infection, saying it is more dangerous to stop taking the medicine too soon than to take it too long.

If it's a close call, analysts have said, Bernanke and rest of the FOMC would probably lean toward another rate increase to reassure financial markets that the Fed remains tough on inflation despite Greenspan's exit.

Greenspan has been lauded for his successes by his fellow economists, awarded the Presidential Medal of Freedom by President Bush and given an honorary knighthood by Queen Elizabeth II.

The gifts presented to him at lunch yesterday by his Fed colleagues were simpler. A chair from the Fed board room. A Fed flag that flew over the central bank's headquarters during his last meeting. A framed collection of dollar bills from each of the 12 regional Federal Reserve banks, signed by the bank presidents yesterday. And, for an ardent baseball fan, a baseball glove signed by each of the bank presidents.

Greenspan also listened to tributes from Fed Board Vice Chairman Roger W. Ferguson Jr. and Fed Bank of Boston President Cathy E. Minehan.

Later, at the employee reception, Greenspan said, "We have a very special mission. We are in charge of the nation's currency, and the central bank, because of that, is involved in everyone's daily lives."

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