Archive for Friday, June 30, 2006

Federal Reserve boosts interest rates

June 30, 2006


— The Federal Reserve hoisted interest rates to the highest point in more than five years Thursday but also raised hopes that a respite from two years of rate pain may be in sight. Wall Street rallied, breathing a sigh of relief.

The Dow Jones industrial average soared 217.24 points to 11,190.80, its biggest single-day jump in more than three years.

Wrapping up a two-day meeting Thursday, Chairman Ben Bernanke and other Fed policymakers didn't rule out another bump in rates. But they seemed hopeful that a slowing economy would lessen pressure on prices, leaving open the question of whether more increases would be needed to declare victory in their battle against inflation.

Fed policymakers said "the extent and timing" of any additional rate increases would hinge on how inflation and economic activity unfold.

They also dropped a phrase - contained in a statement issued at their last meeting on May 10 - that further interest rate increases "may yet be needed" to fend off inflation.

That omission - along with observations that economic growth was slowing - was viewed by some investors and economists as the Fed striking a slightly less hawkish tone about the future course of interest rates.

The Fed's goal is to raise interest rates enough to keep inflation in check but not so much as to hurt economic activity.

To fend off inflation, the Fed unanimously decided on Thursday to increase its federal funds rate by one-quarter percentage point to 5.25 percent. It marked the 17th increase of that size since the Fed began to tighten credit in June 2004.

The funds rate, the interest that banks charge each other on overnight loans, affects a variety of other interest rates charged to consumers and businesses and is the Fed's primary tool for influencing economic activity.

In response, commercial banks raised their prime lending rate - for certain credit cards, home equity lines of credit and other loans - by a corresponding amount, to 8.25 percent.

The actions left both the funds rate and the prime rate at their highest points in more than five years.

The economy grew at a brisk 5.6 percent pace in the first quarter of 2006, the fastest in 2 1/2 years. But activity in the current April-to-June period is expected to clock in at about half that pace - from about 2.5 percent to 3 percent, analysts predict. High energy prices and a cooling housing market figure prominently in forecasts for a slowdown.

Job growth lost momentum heading in the summer. Employers boosted payrolls by just 75,000 in May, the fewest new jobs since October. The government's employment report for June is released next week.


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