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Thu, Dec 16, 2004 - Page 12 News List

US Fed nudges interest rates up again

CONFIDENCE The bank's policy-setting Federal Open Market Committee believes inflation can be kept at bay by slowly lifting credit costs from rock-bottom levels


US Federal Reserve policy-makers probably will keep nudging interest rates upward next year, trying to guard against inflation but moving moderately enough to keep the economy expanding.

The year's fifth one-quarter percentage point increase in a key short-term rate came on Tuesday at the Fed's last regularly scheduled meeting of the year.

That action left the federal funds rate at 2.25 percent, more than double the 46-year low of 1 percent where it stood before the Fed embarked on its string of rate increases in June.

The funds rate, the interest banks charge each other on overnight loans, is the Fed's main tool for influencing economic activity in the US.

The string of rate increases is part of a process to move up the funds rate to a more normal level now that the economy is on firm footing.

Private economists say continuing low rates could sow the seeds of inflation down the road.

"Get used to it: short-term interest rates are going to be lifted substantially over the next year," said Ken Mayland, president of ClearView Economics. "The Fed is not shadowboxing here."

On Tuesday, Fed policy-makers stuck to their view that future rate increases would be gradual.

Economists said they expect another quarter-point boost at the Fed's next meeting on Feb. 1-2, the first of eight scheduled meetings next year.

Some economists predict the Fed wants to push up the funds rate to around 3.50 percent next year. Others think the funds rate will end up around 4 percent.

Either figure, they said, would be relatively neutral, meaning it would neither slow nor stimulate economic activity.

As a result of the Fed's action on Tuesday, commercial banks began increasing their prime lending rate to 5.25 percent from 5 percent. The prime lending rate, the benchmark for many short-term consumer and business loans, moves in step with the funds rate.

The Fed's latest rate action came as the economy continues to gain traction.

The economy grew at an annual rate of 3.9 percent in the July-to-September quarter.

The economy "appears to be growing at a moderate pace despite the earlier rise in energy prices," the Fed said.

Crude oil prices, which hit a record high of just over US$55 a barrel in late October, have moder-ated. Now prices are hovering close to US$42 a barrel.

From an economic perspective, inflation is "well-contained" currently, the Fed said.

Private economists expressed some misgivings that inflation might pick up, given slowing productivity growth, a weakening value of the US dollar and large increases in the price of certain raw materials used by businesses.

The US job market, meanwhile, continues to recover. The economy added a net 112,000 jobs last month, down from 303,000 the previous month.

"Labor market conditions continue to improve gradually,' the Fed said.

Lynn Reaser, chief economist at Banc of America Capital Management, called the Fed's rate increases "a vote of confidence in the sustainability of the expansion."

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