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The Federal Reserve, still concerned about inflation, raised a key interest rate on Tuesday (Nov. 1) to the highest level in more than four years and signaled more increases are likely.
According to an Associated Press report, the Fed announced it was pushing its target for the federal funds rate, the interest that banks charge each other, to 4% from 3.75%, where it had been since the Fed’s last interest-rate meeting on Sept. 20.
It marked the 12th consecutive quarter-point increase since the Fed began gradually raising rates in June 2004 to make sure that a growing economy did not generate higher inflation.
The Fed rate increase was quickly followed by an increase in commercial banks’ prime lending rate, led by Cleveland-based KeyCorp. The prime was raised by a quarter-point to 7%, the highest level for this benchmark for consumer and business borrowing since June 2001.
In a brief statement explaining Tuesday’s action, the Fed retained language it has been using, which said it believes future interest rates can occur “at a pace that is likely to be measured.” That phrase is seen as a signal that the Fed plans to keep raising rates at a gradual pace of quarter-point moves at coming meetings.
Tuesday’s rate hike had been widely expected, given that a number of Fed officials in recent weeks have expressed worries that the sharp rise in energy prices that occurred in early September presented the danger of more widespread inflation pressures down the road.
Analysts noted that the Fed expressed the belief in its statement that economic activity will be boosted by post-hurricane rebuilding. “In other words, slower quarter four growth won’t prevent more hikes,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics, a consulting firm in Valhalla, N.Y.
Many analysts believe the Fed will keep raising interest rates at its final meeting of this year on Dec. 13 and at its first meeting of 2006, on Jan. 31.