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Fed Stays Its Course a 9th Time

Fed Stays Its Course a 9th Time
By EDMUND L. ANDREWS
Published: July 1, 2005


Some uncertainty was cleared up for trading at the New York Stock Exchange after the Federal Reserve raised interest rates another quarter-point. (Diane Bondareff for The New York Times)

WASHINGTON, June 30 - The Federal Reserve raised short-term interest rates on Thursday, the ninth consecutive increase and almost certainly not the last.

As investors expected, the central bank raised the federal funds rate on overnight loans between banks a quarter-point, to 3.25 percent.



In a statement that accompanied the announcement, policy makers gave no hint of when they might slow or stop their march to higher rates.

They repeated previous declarations that monetary policy is "accommodative," which means interest rates are still lower than officials want, and they again said rates could still rise at a "measured" pace.

The Fed has been using those words as a form of advance guidance that it will continue raising short-term rates a quarter-point at each policy meeting until it says something different.

That left investors locked in the same debate about whether the central bank would take a breather at some point in the fall.

"They didn't answer any questions today," said Peter Kretzmer, senior economist at Bank of America. "My feeling is that we will hear some things in July, but they certainly didn't want to indicate that now."

Thursday was the one-year anniversary of the Fed's effort to reverse the easy-money policies it followed after 2001, when it was fighting an economic slowdown and a collapse of the stock market bubble.

Investors hoped that Fed officials would offer some hint that they were getting close to a "neutral" rate, one that would neither stimulate inflationary pressures nor put a brake on growth.

But policy makers made only minor changes to their description of the economy, and those served to reinforce the case for more rate increases.

"Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually," members of the Federal Open Market Committee, the Fed's policy-making body, said in their statement.

That was consistent with the views of Alan Greenspan, the Fed chairman, and it implied that the Fed did not have to fight off a possible slowdown.

The statement also mentioned continued concern about inflation. "Pressures on inflation have stayed elevated, but longer-term expectations remain well contained," the central bank said.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, set off tremors in financial markets in early June when he remarked that the Fed was in "the ninth inning" of its rate-raising campaign.

But Mr. Fisher's comments were at odds with those of most other officials, including Mr. Greenspan.

The Federal Reserve has steadily nudged up the overnight lending rate from a low of 1 percent in June 2004. It is now significantly higher than the European Central Bank's benchmark rate, which is 2 percent.

The most recent economic data suggest that economic growth remains strong and inflationary pressure remains low, despite surging oil prices and rising labor costs.

That has given the Federal Reserve considerable room for maneuvering - and for disagreement. For policy makers who worry that the cost of borrowing is still too low, the apparent resilience of the economy makes it easier to argue for tightening policy.

Supporters of higher rates received fresh ammunition on Wednesday, when the government reported that the economy grew 3.8 percent in the first quarter of 2005, compared with its previous estimate of 3.5 percent.

But inflation has also been milder in recent months, despite the rise of oil prices to more than $60 a barrel early this week.

On Thursday morning, the Commerce Department reported that the Fed's favorite gauge of inflation edged up slightly in May but was still well within the central bank's unofficial comfort zone.

The Commerce Department reported that its price gauge for personal consumption expenditures, excluding energy and food, was up 1.6 percent in May over the year before. That was slightly higher than the year-over-year increase in April, but within the range of 1 percent to 2 percent that policy makers appear to favor.

But in recent public statements, top Fed officials have indicated increased worries about evidence of bubble-like prices in the housing market as well as the nation's rapidly rising foreign indebtedness.

Housing prices have soared over the last year, partly because long-term mortgage rates have declined even as the Fed has been raising short-term rates.


LINK: http://www.nytimes.com/2005/07/01/business/01fed.html?