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Fri, Jul 02, 2004 - Page 12 News List

Fed lifts US interest rates, pledges gradual course

UNANIMOUS DECISION The widely expected move marks an end to a 13-step easing cycle that began in 2001. Analysts said the bank struck the right note


The US Federal Reserve raised interest rates for the first time in four years on Wednesday, boosting them a quarter percentage point in what likely is the first of several rises to keep inflation at bay.

The unanimous decision by the US central bank's policy-setting Federal Open Market Committee moves the benchmark federal funds rate -- which affects credit costs throughout the economy -- to 1.25 percent.

The widely expected move formally ends a 13-step easing cycle that began in 2001 and took the key overnight rate to a 1958 low of 1 percent.

With a pick-up in economic momentum that has created 1.2 million jobs this year and ushered in higher prices, the Fed has embarked on an effort to take away some of the stimulus of cheap credit in gradual stages this year and next.

In a statement issued after its two-day meeting, the central bank repeated a pledge to follow a "measured" pace, which markets have taken to imply a course of smaller, quarter-point rate increases rather than larger ones.

"With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," the Fed said.

"Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," it added in new wording that left it room to move more aggressively if needed.

The Fed also increased the largely symbolic discount rate a quarter point to 2.25 percent.

Analysts said the Fed had struck the right note -- balancing reassurance that no flare-up in inflation was near with a warning they were on guard lest one emerge.

"This is a predictable, user-friendly kind of statement that tells the market that nothing will happen soon to accelerate the pace of the tightening process," said economist Dana Johnson of Banc One Capital Markets.

Higher rates may weigh on debt-heavy consumers but should prove a plus for savers and those living on fixed incomes.

Several US banks raised their prime lending rates -- those offered to their top customers -- a quarter point to 4.25 percent as the Fed action rippled through commercial markets.

US Secretary of the Treasury John Snow said on Wednesday the administration respects Fed independence and shares its goals of growth with low inflation.

Fed officials' assurances that they do not expect a repetition of the kind of aggressive tightening seen in 1994 helped financial markets prepare by "pricing in" expected rises and to face Wed-nesday's rate rise with equanimity.

Prices for bellwether 10-year Treasury notes rose 27/32 of a point and the yield dipped to 4.58 percent.

Stocks strengthened modestly on Wednesday, with the Dow Jones industrial average up 22.05 points to 10,435.48. The high tech-heavy NASDAQ composite index rose 12.86 to 2,047.79.

Among the major economies, Europe is unlikely to follow the Fed's lead until as late as next year because the economic data are mixed and inflationary pressures appear to be easing along with oil prices, analysts said in Frankfurt.

The Bank of Japan's policy board voted unanimously last week to leave its ultra-easy monetary policy unchanged.

But while the short-term rate in Japan was sure to be stuck until deflation dissipated, longer-term Japanese rates were creeping higher on expectations that inflation would slowly re-emerge, said Wachovia global economist Jay Bryson.

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