As expected, the Federal Reserve raised a key interest rate Wednesday by a quarter-point the fourth increase since June in an effort to slow the red-hot economy and keep inflation from becoming a problem.
|Fed Chairman Alan Greenspan raised new worries about inflation in a speech last month.
The action is in line with what most market observers had expected. Many economists believe Wednesday's rate hike is the first of several the Fed will make this year in an attempt to slow an economy that shows few signs of slowing on its own.
The announcement came after a closed-door meeting of the Federal
Reserve Open Market Committee, the officials who set interest rate
The Fed said it was increasing its target for the federal funds
rate the interest that banks charge each other on overnight loan
to 5.75 percent from 5.50 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 5.25 percent from 5 percent.
In a statement explaining its decision, the Fed said it
continued to be worried that the rapidly growing economy "could
foster inflationary imbalances that would undermine the economy's
record economic expansion."
In Wednesday's announcement, the Fed for the first time employed a
new disclosure policy that it hopes will remove some of the
confusion that had arisen in financial markets over the past year
over its announcements concerning potential future actions.
The new simplified announcement said the Fed believes that
future "risks are weighted mainly toward conditions that may
generate heightened inflation pressures in the foreseeable
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.
Many economists believe Wednesday's rate increase will be followed
by two or more increases before the end of June.
The economy grew at a sizzling 5.8 percent annual rate in the
last three months of the year and by 4 percent for all of 1999.
That growth has pushed down the nation's unemployment rate to 4.1
percent, the lowest level in 30 years. Many analysts believe a
further dip to 4 percent will be reflected in January's employment
With the economy growing so fast, employers are having trouble
finding scarce workers to fill job openings. Thus, they are wooing
them with higher wages and benefits, increasing the costs of doing
business to the point that economists and members of the Fed fear a
sharp run-up in prices.
Consumer prices have remained in check but wages and benefits,
as measured by the Labor Department's closely watched employment
cost index, surged in the fourth quarter, touching off fear about
inflation and causing the stock market to plunge when the report
was released last week.
The Associated Press contributed to this report