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.
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.
"The president and his squad of cheerleaders are really talking past working families, many of whom are far more economically insecure than you would know by looking at the top-line economic statistics," said Jared Bernstein, a labor economist at the liberal Economic Policy Institute.
On Monday, Snow acknowledged that the fruits of the recovery are not spreading equally, referring to less-educated workers whose wages have lagged behind others. But Bernstein said labor-participation statistics point to broader discontent in the workforce. Since the last economic peak in March 2001, job opportunities have increased for people without high school diplomas. There are fewer employment opportunities for high school graduates, people with some college education and college graduates.
Jeffrey N. Kleintop, chief investment strategist for PNC Advisors, said Bush put his finger on the real problem: Inflation remains low, but higher energy and health care prices are sticking in people's minds.
The average price of a gallon of unleaded gasoline reached $2.35 yesterday, according to AAA auto club, and oil prices closed just over $63 a barrel yesterday.
"Every day, you drive past a gas station and notice that prices are up," Kleintop said. "It doesn't matter that a DVD player costs a lot less. People are paying more for food and gasoline. They're feeling it at the drugstore each month when they go in to get pharmaceuticals."
Those bad feelings are not restraining consumer spending. Personal consumption rebounded in June, rising $72.2 billion, or 0.8 percent, after decreasing by 0.1 percent the previous month.
"They seem to be taking out those feelings by going to the mall to shop," Kleintop said.
In Texas, the administration's economic team told Bush that he is not getting credit for a strong economy in part because wage growth for many people is being eaten by higher health care costs. If the administration could slow the growth even a small amount, people would have more cash and give him more credit, a top official said. The official spoke on condition of anonymity because the meeting was private.
Premiums for employer-sponsored health plans rose 11.2 percent last year, much higher than the rate of inflation, while the number of uninsured reached 44.7 million in 2003, according to Kaiser Family Foundation, a nonpartisan group that tracks health care costs.
Such concerns are having little impact on overall economic health.
"Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually," the Federal Open Market Committee said in its statement yesterday. "Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained."
Fed officials continue to think their interest rate increases are not applying the brakes to economic growth but simply lifting the foot off the accelerator, analysts said. Berner has been bullish on the economy's prospects all year, but recently raised his second-half growth projection to an annual rate of 4.5 percent, from an annual rate of 4 percent.
"The data has been even more resilient than I thought," he said.