Fed boosts borrowing costs yet again

Martin Wolk Chief economics correspondent • Profile • E-mail

The Federal Reserve raised short-term interest rates another quarter-point Tuesday and signaled more increases to come, boosting borrowing costs for businesses and consumers.

With Alan Greenspan down to his final three months as chairman, Fed policy-makers pushed up the overnight bank lending rate for the 12th time in 16 months to 4 percent, its highest level since June 2001. Commercial banks were expected to follow quickly by raising their prime lending rate a quarter-point to 7 percent, affecting home equity credit lines, business loans and credit card interest rates.

In a statement announcing the rate hike, the Fed reiterated that policy-makers still consider rates relatively low, or accommodative, and intend to continue raising them "at a pace that is likely to be measured." Most analysts believe that means another quarter-point hike when the Fed rate-setting panel meets Dec. 13 and probably one more Jan. 31, at what is scheduled to be the final meeting of Greenspan's 18-year tenure.

White House economic adviser Ben Bernanke, nominated last week by President Bush to succeed Greenspan, is expected to take over the powerful post, assuming he wins Senate approval as expected.

Alan Blinder, a Princeton University economist and former Fed governor, said Greenspan would have inserted new language in the statement if he intended to raise rates only one more time. Instead the Fed left in boilerplate wording it has used since mid-2004 to signal steady quarter-point increases.

"There is no change in course, and markets have already priced in more action," said Steven Wieting, senior economist at Citigroup.

The Fed acknowledged that "hurricane-related disruptions had slowed the economy in recent months but said rebuilding in the hardest-hit areas would reverse that impact and boost production.

"The cumulative rise in energy and other costs have the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained," the Fed said.

Financial stocks fell slightly but the broader market was barely affected by the rate hike, which was widely expected. The Dow Jones industrial average closed with a loss of 32 points, ending just where it was when the Fed announced its decision shortly after 2 p.m. ET.

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