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Fed hikes short-term rates for 12th time

Undaunted by back-to-back hurricanes and higher oil prices, the US Federal Reserve raised short-term interest rates on Tuesday for the 12th time in a row and made it clear that more increases were on the way.

In a statement, Fed policymakers said the economic disruptions caused by hurricanes were essentially transitory and signaled that they were more worried about higher inflation than about slower growth.

"Elevated energy prices and hurricane-related disruptions in economic activity," the central bank said in raising the rate to 4 percent from 3.75 percent, "have temporarily depressed output and employment."

The decision means that the Federal Reserve is almost certain to raise rates at policy meetings next month and in January, and it will probably keep going after Alan Greenspan retires as Fed chairman at the end of January.

In effect, Greenspan's last act as chairman amounts to a carefully choreographed effort to shore up the Fed's credibility and gently reverse an extraordinary period of cheap borrowing.

Under Greenspan, the Fed reduced short-term rates to 1 percent in 2003 and kept them there for a year in order to shore up the economy.

Since last June, the Fed has been inching rates back toward a "neutral" rate that neither stokes inflation nor stifles growth.

"The Fed is saying that `we're being tested here, we're being tes-ted on our anti-inflation credibility,'" said Ethan Harris, chief economist at Lehman Brothers.

"They need to sound tough. They need a pretty good bark to go with their bite," Harris said.

The federal funds rate is now at its highest level since June 2001, but it is still well below its most recent peak of 6.5 percent at the end of 2000.

The Fed continued to describe its policy as accommodative -- meaning that interest rates are still low -- and predicted that the economic disruptions caused by recent hurricanes and spiking oil prices would essentially be transitory. It also reiterated its desire to keep raising rates at a "pace that is likely to be measured."

Some analysts suspect that Fed officials may be contemplating the need to go beyond "neutral" and apply the brakes. Greenspan told lawmakers early this year that people would recognize a "neutral" level when they reached it. Some Fed policymakers have publicly suggested that it could be 5 percent or higher.

Thus far, the underlying rate of inflation has yet to show many signs of being pushed higher by the surge in oil prices.

The Consumer Price Index in September was 4.7 percent higher than a year earlier, the biggest jump in years, but most of that was because of escalating global fuel prices.

Greenspan and most other Fed officials tend to view higher energy prices as a one-time event and pay much closer attention to the "core" rate of inflation that excludes energy and food prices.
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