Fed raises U.S. rates, measured hikes to continue
Industry News

By Glenn Somerville
WASHINGTON, Nov 1 (Reuters) - The Federal Reserve raised U.S. interest rates Tuesday for the 12th straight time, taking them to the highest level in more than four years and indicating more hikes will be needed to keep inflation at bay.

The central bank's policy-setting Federal Open Market Committee, expressing concern over potential inflation pressures, voted unanimously to raise the benchmark federal funds rate charged on overnight loans between banks a quarter percentage point to 4 percent. The move extended a campaign of rate rises the Fed initiated in mid-2004 and took overnight borrowing costs to a level last seen in June 2001.

In a statement outlining its widely expected decision, the Fed described monetary policy as accommodative -- its way of saying more hikes are needed -- and said hurricanes that struck earlier this year were unlikely to derail economic expansion.
"Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment," the Fed said in its post-meeting statement. "However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas," it added.
Financial markets lost a little ground on the latest rate rise. Bond prices slipped as investors absorbed the news that more hikes are coming. The 30-year U.S. Treasury bond was down 2/32 and yielded 4.76 percent while the bellwether 10-year Treasury note declined 2/32 to yield 4.57 percent. Stocks closed moderately lower but it had more to do with a disappointing earnings statement from computer maker Dell Inc. The Dow Jones industrial average was down 33.30 points to end at 10,406.77 while the technology-laced Nasdaq Composite Index lost 6.25 points to end at 2,114.05.

The Fed repeated that it was worried high energy prices could add to inflation pressures, although it said inflation outside of food and energy prices, and expectations of future inflation over the long haul were still contained.
"With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," the statement said. Analysts said policy-makers had so thoroughly signaled their intentions that the rates decision was no surprise. "I think this is telling you that they are going to do at least another (rate hike), and then likely a couple more after that," said economist Robert MacIntosh of Eaton Vance Management in Boston who foresaw three more hikes ahead.

"Greenspan will be done early next year, and then Bernanke likely needs to prove himself so he will probably do one as well," MacIntosh suggested. The Fed has been aiming to bring short-term rates to neutral -- a rate that neither hinders growth nor fires inflation. Exactly where that is remains unclear though private-sector analysts speculate it's around 4.5 percent.

Economist Richard DeKaser of National City Corp. in Cleveland said it was evident that policy-makers were not about to call a halt. "There's nothing here about being close to neutral," he said. "They have not tipped their hand where neutral is."

Recent comments by Fed policy-makers underline that.

"We are considerably closer to where policy needs to be than we were 16 months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while," Fed Governor Donald Kohn said two weeks ago. The chief economist of the U.S. Chamber of Commerce, Martin Regalia, was relieved the Fed had not sharpened its inflation warnings in view of recent hawkish Fed statements. "Those of us who think the Fed is doing a good job now and who feel the economy already has begun slowing toward its long-term potential think it's a good thing that they didn't change the directive," Regalia said.

Costlier energy is one factor making the Fed wary. Oil prices that had jumped to a record $70.85 a barrel shortly after Hurricane Katrina struck in August were below $60 Tuesday, but there were still concerns about the winter heating season. Meanwhile, economic growth has remained durable in the face of costlier energy and the heavy damage to the U.S. Gulf Coast region caused by Katrina and late-September's Hurricane Rita.

The government said last week that growth in gross domestic product -- a gauge of total goods and services output within U.S. borders -- accelerated to a 3.8 percent annual rate in the third quarter from the second quarter's 3.3 percent. In the statement outlining its action, the Fed said upside and downside risks to its twin goals of sustainable growth and price stability remained "roughly equal."

The U.S. central bank is widely expected to keep raising rates at least through the tenure of current Fed Chairman Alan Greenspan, which ends in January. The remaining two meetings under the Greenspan era are scheduled for Dec. 13 and Jan. 31. Betting was about even in futures markets that President George W. Bush's nominee to replace Greenspan, former Fed Governor Ben Bernanke, will oversee one more rate rise in March when he chairs his first policy-setting meeting.

Reuters 2005. All Rights Reserved.

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