Fed raises key interest rate for fourth time

WASHINGTON (AP) -- The Federal Reserve, still seeking to slow the supercharged U.S. economy, raised borrowing costs for millions of<br>Americans for a fourth time since June by pushing a key interest rate

Wednesday, February 2nd 2000, 12:00 am

By: News On 6

WASHINGTON (AP) -- The Federal Reserve, still seeking to slow the supercharged U.S. economy, raised borrowing costs for millions of
Americans for a fourth time since June by pushing a key interest rate up a quarter point to 5.75 percent Wednesday.

The Fed action to boost its federal funds rate, the interest that banks charge each other, was quickly followed by announcements from major banks around the country that they were raising their prime lending rate a similar quarter point to 8.75 percent, the highest level for this benchmark consumer and business rate since late 1995.

Wall Street, which had been worried that the central bank might feel the need to raise rates by a half-point, turned in a mixed performance Wednesday with the Dow Jones industrial average down 38.85 points at 11,003.20.

Analysts said while the Fed stopped with just a quarter-point increase, investors were clearly worried by the tone of the Fed announcement, which indicated further increases were in store.

"This was a much more hawkish statement from the Fed today than any of the statements that accompanied its three rate hikes last
year," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

Many economists predicted the Fed would raise rates again at the next meeting of its Federal Open Market Committee on March 21 and again at the May 16 meeting. Some analysts said the unrelenting strength of the economy could prompt a seventh quarter-point move at the June 28 meeting.

"The Fed wants to bring this high-flying economy down to a soft landing," said Richard Yamarone, an economist at Argus Research
Corp. "The rate increases so far haven't really taken a toll on the economy, especially the consumer sector."

While private economists saw the economic logic behind the Fed's actions, a small band Fed critics complained that the central bank
was fighting a phantom menace, given that outside of rising energy costs, inflation has remained exceptionally low despite there; pretty soon you're bleeding pretty badly," Sen. Tom Harkin, D-Iowa, said of the four rate increases in the past six months.

Sen. Byron Dorgan, D-N.D., complained that the Fed's rate increases "impose a tax on every single American citizen through higher interest rates," all to fight what Dorgan said was a nonexistent inflation threat.

Harkin and Dorgan spoke on the Senate floor as the Senate debated whether to confirm Alan Greenspan, 73, for a fourth four-year term as Fed chairman.

Greenspan was expected to win the confirmation vote easily, with Senate Banking Committee Chairman Phil Gramm, R-Texas, saying his 12-year record as Fed chairman could be used to build "a strong case that Alan Greenspan is the greatest central banker in the
history of the world."

The Senate was scheduled to vote on Greenspan's nomination Thursday.

In addition to boosting the federal funds rate, the Fed increased its largely symbolic discount rate, the rate the Fed charges to make direct loans to banks, by a quarter point to 5.25 percent.

In the statement announcing the Fed decisions, the policy-makers said they remained concerned that the strong economy and tight labor markets will produce rising wage demands that will not be offset by gains in productivity.

"Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion," the Fed said in explaining its decision.

While productivity, the amount of output per hour of work, has shown big gains in recent years, Greenspan has expressed growing
worries that the dwindling supply of available workers will eventually overwhelm these productivity increases, forcing employers to raise product prices to cover their higher wage costs.

Bruce Steinberg, chief economist at Merrill Lynch in New York, said he expected upcoming unemployment reports to be the biggest factor guiding Fed policies.

"The Fed does not want to see further declines in the unemployment rate," Steinberg said, forecasting that Friday's report will show the jobless rate dipping in January to 4 percent.

In the first use of its new disclosure policy, the Fed said it viewed future risks "weighted mainly toward conditions that may generate heightened inflation pressures."

A string of recent indicators have shown the economy, which set a record this month for the longest expansion in U.S. history, was
growing at a rate of 5.8 percent in the fourth quarter.

On Wednesday, the government reported that sales of new single family homes set a record for the second straight year with 904,000 homes sold in 1999, up 2 percent from 1998, indicating that rising mortgage rates have had little effect so far in slowing sales demand.

In a second report, the Index of Leading Economic Indicators, designed to predict future economic activity, rose a strong 0.4
percent in December, its biggest gain in nearly a year, indicating the current expansion is in no danger of faltering.