ECONOMY Fed raises short-term interest rate again
Optimistic policymakers expect more growth and an improving job market.
WASHINGTON -- Federal Reserve officials raised a key short-term interest rate Wednesday and indicated they will continue lifting rates gradually this year to keep inflation in check as the economy grows.
Members of the Fed's top policymaking committee agreed unanimously to nudge the benchmark federal funds interest rate up to 2.5 percent from 2.25 percent. The action marked the sixth increase of a quarter-percentage point since June, when the group started moving the rate up from 1 percent.
Fed policymakers are generally very upbeat these days, indicating in recent public remarks that they expect the economy to grow at a healthy pace this year while the job market improves and inflation remains tame.
At 2.5 percent, the rate is still so low it is still stimulating economic growth, the committee said after the meeting in a statement nearly identical to that issued after its previous meeting in December. With the economy now strong enough that it doesn't need that extra push, the Fed wants to raise the rate to avoid fueling inflationary pressures.
But with inflation low, Fed officials think they probably will keep raising the federal funds rate at a "measured" pace, they said in the statement. That means they likely will keep lifting the rate in small steps, of a quarter-point at a time, spread over many months.
At the same time, the group repeated language that emphasized its flexibility to pick up the pace of rate increases if inflation pressures build, or to move more slowly if the economy loses steam.
"The Fed's continuity suggests no plans to alter the thrust of its policy over the next few months," said Peter E. Kretzmer, a senior economist with Bank of America Corp.
The federal funds rate, the interest rate charged between banks on overnight loans, influences many other rates on business and personal loans. Major banks are expected to follow by raising their prime rate for business customers by a similar quarter-point, to 5.5 percent. Many consumer rates tied to the prime, such as on many credit-cards and home-equity loans, may rise as well.
Yet financial conditions have not tightened since the Fed started raising its rate last June, for the first time in four years. Mortgage rates, for example, were slightly lower last week than they were last spring. The national average rate on a 30-year, fixed-rate mortgage slipped to 5.66 percent last week, compared with rates above 6 percent last year.
Longer term rates are influenced by the federal funds rate, but ultimately they are determined by the markets in response to the overall demand for capital and investors' inflation expectations. With that demand still relatively mild and inflation expectations low, longer rates have not changed much.
But mortgage rates and other business and personal loans should rise this year as the economy grows and the Fed raises the funds rate higher, analysts say.
Fed officials have not said how far they will raise the funds rate this year and next. Several have said they want to move it closer to a "neutral" level that would neither spur nor slow economic growth, although they disagree about where that point lies. Individual Fed officials have offered various estimates, between 3.5 and 5.5. percent, and generally agree that it varies with economic conditions.
Economists have generally predicted the Fed will keep raising the rate to somewhere between 3 and 4 percent this year, depending on how strongly the economy expands and how inflation behaves. Many analysts predict the Fed will raise the rate again at each of the next two scheduled meetings, in March and May.