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Fed raises US interest rates to 3 percent

Employees of KV Execution Services get the interest rate decision of the US Federal Reserve Board on a screen in their booth on the floor of the New York Stock Exchange on Tuesday. The Fed nudged a key interest rate up by another quarter-point on Tuesday to 3 percent. PHOTO: AP

The US Federal Reserve, worried about rising inflation, pushed a key interest rate higher and signaled that Americans' borrowing costs are likely to keep climbing in the months ahead.

In response, commercial banks began lifting their prime lending rates, which are used for many short-term consumer and business loans.

Federal Reserve Chairman Alan Greenspan and his colleagues, sticking to a course of gradually raising rates, nudged up the federal funds rate on Tuesday by one-quarter of a percentage point, to 3 percent.

It was the eighth increase of that size since the Fed began to tighten credit last June, and it left the rate at the highest level since the fall of 2001.

Banks' prime lending rates were rising a quarter-point to 6 percent, also the highest since 2001.

The federal funds rate, the interest banks charge each other on overnight loans, is now triple the 1 percent rate -- a 46-year low -- that prevailed before the Fed embarked on its rate-raising campaign.

"The solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices."

from a statement by Fed policy-makers

Fed policy-makers, walking a tightrope, are confronted with two challenging economic forces: rising inflation pressures on the one hand and slowing economic growth on the other.

The policy-makers, in a brief statement issued after their closed-door meeting, acknowledged that the economy had hit a rough patch in early spring.

"The solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices," they said.

Oil prices soared into record territory in March and hit a new peak of US$57.27 a barrel at the beginning of April -- straining household and business budgets. Prices have since retreated and settled at US$49.50 a barrel on Tuesday.

The Fed also drew fresh attention to rising prices in general.

"Pressures on inflation have picked up in recent months and pricing power is more evident," the statement said, a reference to businesses finding it easier to raise prices to customers.

But it tempered that inflation warning with an assessment that longer-term inflation expectations remain "well contained." That phrase was inadvertently omitted from the Fed's statement. It later issued a corrected version to include it.

The Fed also said underlying inflation -- which excludes energy and food prices -- is "expected to be contained."

Against that backdrop, the Fed said it could continue on its path of gradually raising rates.

In Fed parlance that is stated as "at a pace that is likely to be measured." To analysts, that phrase translates into quarter-point increases.

On Wall Street, the Dow Jones industrials gained 5.25 points to close at 10,256.95 on Tuesday.

Private analysts expect the Fed to boost rates by another quarter-point at its next meeting June 29-30 and probably through much of this year. That said, they also believe the Fed's future rate decisions could become increasingly more dependent on how inflation and economic activity unfold.
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