WASHINGTON (AP) -- The Federal Reserve today raised interest
rates by a quarter point in an effort to cool the economy by making
it more expensive for Americans to borrow.
The Fed said it was increasing its target for the federal funds
rates -- the interest banks charge each other on overnight loans --
to 5.25 percent from 5 percent.
It marked the second time this summer that the Fed has raised
this rate. It boosted the funds rate from 4.75 percent to 5 percent
on June 30, the first increase in two years.
Wall Street, which had anticipated the increase, appeared to
shrug off the news. The Dow Jones average of 30 blue-chip
industrial stocks rose slightly and the yield on long-term bonds
To drive home its efforts to fight inflation, the Fed also
raised the discount rate, the interest that it charges for direct
loans to banks, by a quarter of a point as well. The discount rate
was increased to 4.75 percent, the first increase in the discount
since Feb. 1, 1995.
The increase in the federal funds rate had been widely expected,
and some analysts had also forecast a raise in the largely symbolic
In a statement, the Fed said that its actions today and the June
30 rate increase should "markedly diminish the risk of rising
inflation going forward."
Accordingly, the central bank said it was keeping its policy
directive, which signals possible future actions, on neutral. It
had switched to a neutral directive following its June 30 rate
The Fed actions came after a closed-door meeting today by the
Federal Open Market Committee, Fed governors and bank presidents
who meet eight times a year to set interest rate policies.
The Fed's rate increases were expected to be followed quickly by
announcements from commercial banks that they were boosting their
prime lending rate by a similar quarter point, from the current 8
percent to 8.25 percent. The prime rate is a key benchmark for
millions of loans, from home equity and credit card balances to
short-term loans for small businesses.
Although the economy has slowed in recent months, it is still
expected to grow almost 4 percent this year, a brisk pace that has
pushed unemployment down to its lowest level in three decades.
While that's good news for workers, it is worrisome to the Fed,
which is concerned that employers foraging for workers are wooing
them with higher wages and benefits -- something that could drive up
prices and spark inflation down the road.
Many analysts see the Fed's goal this year as taking away some
of the stimulus it provided last fall when it cut interest rates
three times to counter a growing threat that the Asian financial
crisis could topple the United States into recession. Now those
Asian economies are slowly on the mend.
"With financial markets functioning more normally and with
persistent strength in domestic demand, foreign economies firming
and labor markets remaining very tight, the degree of monetary ease
required to address the global financial market turmoil of last
fall is no longer consistent with sustained, non-inflationary
economic expansion," the Fed said in a statement explaining
today's policy actions.
When the Fed raised rates in June it also switched it policy
directive from one leaning toward a rate increase to neutral. That
caused the financial markets to rally, boosting stock prices and
pushing long-term interest rates.
In July, Federal Reserve Chairman Alan Greenspan tried to
correct the situation by sounding more hawkish in an appearance
before Congress, pledging to move "promptly and forcefully" to
counter inflation. Those remarks were taken as strongly signaling
an August rate increase.