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Thu, Sep 23, 2004 - Page 12 News List

Fed raises interest rates

THIRD TIME A CHARM?The third hike in as many months increased federal funds rate on overnight loans between banks from 1.5 percent to 1.75 percent


The US Federal Reserve raised short-term interest rates another quarter of a point on Tuesday, and it suggested that it would keep raising them gradually over the next year.

It was the Fed's third rate increase in three months. Coming less than seven weeks before the presidential election on Nov. 2, the decision pushed the federal funds rate on overnight loans between banks up to 1.75 percent from 1.5 percent.

While incumbent presidents nor-mally cringe at the prospect of higher rates before an election, the increases are not expected to pose a threat to President George W. Bush because consumers and businesses have felt almost no tangible impact.

Long-term interest rates, which determine home mortgage rates and many commercial loans, have edged down since June as fears of inflation have receded.

And because this was the Fed's last policy meeting before the election, consumers are unlikely to feel any more pinch from rates before the election than they have already.

"If anything, the effect on consumers has been positive," said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.

Rates on 30-year fixed rate mortgages have declined from about 6.25 percent in June to 5.63 percent in the middle of this month, and the housing market remains almost as hot as ever. Stock and bond markets reacted very little to the decision, suggesting that long-term interest rates are likely to remain steady through the election as well.

Shortly before the Fed announced its decision, the Commerce Department reported that housing construction, which had been expected to slow as rates went up, climbed to an annual rate of 2 million homes last month. That was the highest level in five months.

The main question ahead of Tuesday's decision was whether the central bank would signal any change in its goal of raising rates at a measured pace of regular quarter-point increases over the next year.

It did not, and if anything expressed greater optimism about the economy and therefore greater confidence about raising rates than it did after its previous policy meeting on Aug. 10.

"Output growth appears to have regained some traction, and labor market conditions have improved modestly," the Federal Open Market Committee said in a statement accompanying its decision.

Reiterating previous statements, the Fed stressed that interest rates were still low.

"Even after this action, the stance of monetary policy remains accommodative," the Fed said in its statement.

Fed officials have made it clear that short-term rates, which were pushed down to 1 percent last year, are too low to be sustainable.

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