Capital Markets

Fed Hikes Rates by Quarter Point

Despite recent news of economic sluggishness, the Federal Reserve stays the course of moderate increases.
Stephen TaubAugust 11, 2004

It’s onward and upward for the Federal Reserve. On Tuesday, The Federal Open Market Committee raised its target for the federal funds rate by 25 basis points, to 1.5 percent.

Although the move was widely expected, some observers thought the Fed might hold off on any action on the heels of recently sluggish economic news.

But the committee doesn’t believe its action will curtail growth. “In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed,” according to a statement issued by the Fed announcing the rate hike. “This softness likely owes importantly to the substantial rise in energy prices.”

Nevertheless, the Fed said, the economy still seems poised to resume a stronger pace of expansion in the future. It noted that inflation has been somewhat elevated this year, “though a portion of the rise in prices seems to reflect transitory factors.”

The risks to attaining of both sustainable growth and price stability for the next few quarters are about equal, according to the Fed. “With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability,” it said.

In a related action, the board of governors approved a 25 basis point increase in the discount rate to 2.5 percent. The discount rate is the interest rate that banks pay on short-term loans from a Federal Reserve bank.

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