Fed raises interest rates a quarter point

Tuesday, March 21st 2000, 12:00 am

By: News On 6

WASHINGTON (AP) -- The Federal Reserve raised a key interest rate today by a quarter-point -- the fifth increase since June -- in an effort to slow the speeding economy and keep inflation from escalating.

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-- to 6 percent from 5.75 percent.

It also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by a quarter-point to 5.50 percent from 5.25 percent.

The long-expected increase had little immediate impact on Wall Street. A quarter hour after the increase was announced, the Dow Jones blue-chip stock average was virtually unchanged; the Nasdaq index had dropped 18 points and the yield on 30-year Treasury bonds was unchanged.

In a statement explaining its decision, the Fed said it continues to remain concerned that the rapidly growing economy "could foster inflationary imbalances that would undermine the economy's record economic expansion."

The Fed's quarter-point increase in the funds rate was expected to be quickly followed by announcements from commercial banks that they were boosting their prime lending rate by a similar quarter point, from the current 8.75 percent to 9 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.

The Fed had already raised rates four times in quarter-point steps since Jun l. The increases have done little to either slow the economy or its main engine -- consumer spending, which accounts for two-thirds of all economic activity.

The Fed said future "risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

This statement does not guarantee that there will be future rate increases but it puts financial markets on notice that the Fed continues to be worried about inflation dangers.

In recent speeches, Federal Reserve Chairman Alan Greenspan raised new worries that too-rapid growth could derail the record-breaking economy, which is in the 108th month of uninterrupted growth. Many economists took those remarks as a signal that higher interest rates would be forthcoming.

The economy grew by a breakneck 6.9 percent annual rate in the final three months of 1999 and many economists believe growth in the current quarter will come in around 5 percent, far above the 3.5 percent rate the Fed would like to see at this stage of the economic expansion.

Greenspan has warned in recent speeches that the strong consumer demand, which he said was being powered by the surge in wealth created by the stock market, cannot continue to outstrip supply without triggering serious inflation problems.

To some Fed watchers, Greenspan's warning seemed to indicate the Fed was aiming its interest rate increases squarely at the high-flying stock market, prompting some in Congress to question what business the Fed has in trying to jack up interest rates in order to make stock prices fall.

But others believe Greenspan's comments were misinterpreted and the point he was trying to make was that strong demand, from whatever source, needs to moderate in order to keep inflation under control.

Thus far, even with robust growth, core inflation has remained tame. Prices at both the wholesale and consumer levels surged in February, but that was largely due to a big jump in energy prices.

Beyond today's meeting, many economists are looking for at least two more rate increases -- at the May 16 meeting and the June 28 meeting -- pushing the funds rate up to 6.5 per cent, the highest it has been since January 1991 when George Bush was in the White House.

After that, many analysts believe the central bank will sit back and watch how the economy reacts during the summer and fall presidential campaign.
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On the Net: The Federal Reserve's site: http://www.federalreserve.gov