Posted on: Friday, July 1, 2005

Fed rate bumped up again to 3.25%

By Nell Henderson
Washington Post

WASHINGTON — The Federal Reserve, conveying continued concern about price pressures, raised its key short-term interest rate yesterday for the ninth time in a year and indicated it will keep moving the rate gradually higher in coming months to keep the lid on inflation.

Fed officials, in a statement released after their policy-making meeting, expressed confidence in the economy's strength despite the recent surge in energy prices.

"The expansion remains firm and labor market conditions continue to improve gradually," the central bank's top policymaking group, the Federal Open Market Committee, said after raising its benchmark federal funds rate to 3.25 percent from 3 percent.

The group has raised the rate in nine quarter-percentage point steps over the past year from a four-decade low of 1 percent. During that time, the economy has expanded at a healthy pace, while unemployment has fallen and price inflation for items other than energy has remained tame.

But Fed officials remain concerned about the potential for future inflation, citing rising labor and energy costs. They note that businesses are finding it easier to raise prices. And they are studying whether the nation's booming housing market is helping push up consumer prices.

"Pressures on inflation have stayed elevated," the Fed statement said.

Banks responded by increasing their prime rates. Bank of Hawaii and First Hawaiian Bank raised their prime lending rates to 6.25 percent, from 6.0 percent.

Stocks fell after the announcement, as investors concluded that short-term rates will keep going higher for a while.

"There's nothing here to hint that the rate hikes might stop soon," Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., wrote in an analysis of the Fed statement. "If anything, the hint is the other way."

Fed officials also repeated that they probably can keep raising the fed funds rate, the overnight rate charged between banks, at a "measured" pace in the months to come.

Advertiser staff contributed to this report.