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The Honolulu Advertiser
Posted on: Wednesday, August 10, 2005

Fed imposes 10th rate hike

By Jeannine Aversa
Associated Press

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WASHINGTON — The Federal Reserve pushed borrowing costs to their highest point in nearly four years yesterday in an attempt to make sure the combination of high energy prices and a solidly growing economy doesn't lead to inflation.

Chairman Alan Greenspan and his colleagues lifted a key short-term rate, called the federal funds rate, by one-quarter percentage point to 3.5 percent. It marked the 10th increase of that size in the Fed's 14-month campaign to tighten credit.

In response, commercial banks began raising their prime lending rates — used for many short-term consumer loans, including variable-rate credit cards and popular home equity lines of credit— by a corresponding amount to 6.5 percent.

Hawai'i's three largest financial institutions responded to the Federal Reserve's move by raising their own base lending rates. Bank of Hawaii, First Hawaiian Bank and American Savings Bank raised their rates from 6.25 percent to 6.5 percent.

The increases left both the funds rate and the prime lending rates at their highest levels in nearly four years.

Fed policymakers, in a brief statement accompanying their rate decision, had mostly good things to say about the economy. They said that despite high energy prices, consumers and businesses are spending — important forces behind economic activity. And they noted that the job climate continues to improve.

But the policymakers made clear once again that fighting inflation — which doesn't yet appear to be a danger to the economy — remains a top mission. "Pressures on inflation have stayed elevated," they said. The Fed's previous statement, on June 30, used the same language.

Against that backdrop, the Fed stuck to its course of gradually raising rates to fend off inflation.

It said future rate increases would be at "at a pace that is likely to be measured." Analysts view that phrase as meaning additional quarter-point increases at the Fed's next meeting, Sept. 20, as well as the year's last two meetings in November and December.

If that turns out to be the case, the funds rate — the interest banks charge each other on overnight loans — would climb to 4.25 percent by the end of this year. That would push the prime rate to 7.25 percent.

"The Fed is very comfortable with its strategy of slowly pushing rates higher," said Lynn Reaser, chief economist at Banc of America Capital Management. "It, however, believes we still have a ways to go before rates get to a level that will keep the economy growing but also hold inflation in check."

As the Fed took action yesterday, stocks rose on Wall Street. The Dow Jones industrials gained 78.74 points to close at 10,615.67.

President Bush's handling of the economy isn't getting rave reviews from the public. An Associated Press-Ipsos poll this month showed his economic approval rating at 41 percent — his lowest rating yet on that poll.

Bush held a strategy session with economic advisers at his Texas ranch yesterday.

Of the Fed's higher rates, the president said: "I trust the judgment of Chairman Alan Greenspan. He makes decisions based upon facts, not based upon politics."

Asked whether he is concerned that higher interest rates will slow economic growth, Bush responded: "I think we're more concerned about energy prices and healthcare prices."