Posted on: Wednesday, September 22, 2004

Fed boosts key rate to 1.75%

By Jeannine Aversa
Associated Press

WASHINGTON —With the economy moving ahead and the nation's payrolls picking up a bit, Federal Reserve policy-makers boosted short-term interest rates for a third time this year — but left economists split about when the next increase might come.

Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues — the group that sets interest-rate policy — increased the target for the federal funds rate from 1.50 percent to 1.75 percent yesterday. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.

In Hawai'i, First Hawaiian Bank, Bank of Hawaii and American Savings Bank hiked their prime rates to 4.75 percent in response to the Fed's move.

The Fed, explaining its unanimous decision, said the economy — which slowed earlier this year partly because of soaring energy prices — now "appears to have regained some traction." That echoed a comment Greenspan made to Congress earlier this month.

In another encouraging note, the Fed said, "Labor market conditions have improved modestly." That was a better assessment than the Fed offered in August, when it said job market improvements had slowed.

"The Fed is sending a message of relative comfort with the current condition of the economy," said Lynn Reaser, chief economist at Banc of America Capital Management. "They suggested we are pulling out of the soft patch."

The Fed's rate increase comes with Election Day just six weeks away. President Bush and his Democratic rival, John Kerry, hold widely divergent views of the health of the economy and the job market.

Incumbent politicians normally are unhappy if the Fed raises interest rates close to an election. Yet, some economists said that by raising rates, the Fed could be viewed as appearing comfortable about the pace of the economy's expansion, which could be seen as good for the Bush campaign.

Other economists said that if the Fed had dropped its gradual rate-raising approach and had passed on a rate increase this month, it might have looked politically motivated.

"I think what they needed to do so close to the election is not stray from the path that they had set out," said Carl Tannenbaum, chief economist at LaSalle Bank. "Maintaining their course for rates is the wisest thing to do both economically and politically."

The Fed's rate-raising campaign began in June when the central bank ordered its first rate increase in four years. Since then, the Fed raised the rates in August and then yesterday.

Fed policy-makers stuck to their view that future rate increases would be gradual because inflation is expected to remain relatively low. Inflation has eased in recent months despite the rise in energy prices.

Analysts believe the funds rate will rise to 2 percent by the end of this year.