« More News About the Second Quarter | Main | Ben Bernanke Goes to Crawford »

August 10, 2005

The FOMC Does Not Pause But Keeps Raising Interest Rates

Interest rates rise as the Federal Reserve keeps on its course:

WSJ.com - Fed Raises Key Rate to 3.5%, Continuing String of Increases: WASHINGTON -- The Federal Reserve, citing "elevated" price pressures in the U.S. economy, boosted its key interest rate to a four-year high Tuesday and said it aims to extend the campaign of gradual interest-rate increases it began in mid-2004.

Amid signs the economy is gaining speed despite record oil prices, Fed policy makers voted unanimously to raise the key federal-funds rate a quarter percentage point to 3.5%. The increase, the tenth since June 2004, made the campaign of rate hikes the longest since Alan Greenspan became Fed chairman in 1987.

"Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor-market conditions continue to improve gradually," the Fed's Open Market Committee said in a statement. It reasserted its previous view that "pressures on inflation have stayed elevated" but added that "core inflation has been relatively low in recent months and longer-term inflation expectations remain well-contained."

The committee hinted it intends to raise the funds rate at least once more, possibly as early as Sept. 20, saying the rate remains too low -- "accommodative" in Fed parlance. It pledged, however, to raise the rate in "measured" increments. That phrase so far has signified increases of a quarter percentage point at a time.

The decision, widely expected on Wall Street, came as economic forecasters began to reassess their views on how much more the Fed will need to raise the funds rate to hold inflation down. Until a few weeks ago, most forecasters expected the Fed to "pause" its interest-rate campaign later this year, possibly opting to forgo a rate increase in December.

Posted by DeLong at August 10, 2005 05:16 PM