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Fed Hikes Interest Rate a Half Point

Updated:
WASHINGTON (AP) — The Federal Reserve raised a key interest rate by one-half point today, the biggest increase in five years, in an effort to slow the supercharged economy and keep inflation from becoming a problem.

The announcement came after a closed-door meeting of the Federal Reserve's Federal Open Market Committee, the officials who set interest rate policies.

The Fed said it was increasing its target for the federal funds rate — the interest that banks charge each other on overnight loans — from 6 percent to 6.50 percent, the highest level in nine years.

The central bank also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by a half- point to 6 percent from 5.50 percent.

In a statement explaining its decision, the Fed said the rapidly growing economy ``could foster inflationary imbalances that would undermine the economy's outstanding performance.''

The rate hike initially had only a moderate impact on Wall Street, where investors had widely expected the half-point increase. The Dow Jones industrial average, up 135 points immediately before the mid-afternoon announcement, remained in positive territory.

The Fed's half-point increase in the funds rate was quickly followed by announcements from commercial banks that they were boosting their prime lending rate by a similar half-point, from the current 9 percent to 9.50 percent, the highest level in nine years. The first announcements were made by Bank of America and Bank One.

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.

Today's decision marked the sixth time since last June that the central bank has boosted the funds rate in an effort to slow the speeding economy and keep inflation from escalating.

Many economists had expected today's bolder one-half point move, believing that the central bank wanted to demonstrate that it was prepared to move more aggressively to dampen an economy that is still growing at an exceptionally rapid pace.

In the part of the Fed's statement that reflects possible future moves, the central bank said ``risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.''

The record-breaking economy, now in its longest-ever streak of uninterrupted growth, has continued to barrel ahead. But a report today by the Labor Department showed good news on the inflation front.

For the first time in almost a year, the Consumer Price Index, the most closely watched inflation gauge, was unchanged in April, matching many analysts' expectations. Falling prices for energy helped offset rising prices for tobacco, prescription drugs and other items.

The booming economy, which grew at a sizzling rate of 5.4 percent in the first three months of 2000, has pushed the nation's unemployment rate below 4 percent for the first time in 30 years. Economists view such developments as signs that demand is having trouble keeping up with supply, sowing the seeds of inflation.

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On the Net: Federal Reserve site: http://www.federalreserve.gov
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