Fed increases key rate again

WASHINGTON – The Federal Reserve, caught between a sudden economic slowdown and heightened worries about inflation, decided to nudge a key interest rate up by another quarter-point on Tuesday.

The move, which had been widely expected by financial markets, pushed the federal funds rate up to 3 percent. It was the eighth increase in the interest that banks charge each other on overnight loans since the central bank began its credit tightening campaign last June.

The Fed also retained a promise it has been making for the past year to move rates up “at a pace that is likely to be measured,” a phrase that markets have interpreted as signaling continued small quarter-point rate increases.

The decision by Federal Reserve Chairman Alan Greenspan and his colleagues came as the central bank is being buffeted by strong economic crosscurrents – rising inflation pressures on one hand and a sudden slowing in economic growth on the other.

Noting the recent slowdown, the Fed in its statement said, “Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.”

The Fed also noted rising prices, saying, “Pressures on inflation have picked up in recent months and pricing power is more evident.”

In what the Fed called an inadvertent mistake, it left out a follow-up sentence on inflation, stating, “Longer-term inflation expectations remain well contained.”

The Fed called reporters slightly less than two hours after the initial announcement to reveal the mistake, asking that the dropped sentence be reported before Wall Street stock trading closed for the day.

Wall Street, which had been in positive territory just before the Fed’s announcement, fell into negative territory and was down about 26 points when the Fed announced its mistake.

David Jones, chief economist at DMJ Advisors, said Fed officials apparently believe that “the pickup in inflation pressures and the slowing in the economy are transitory.”

Jones predicted the central bank would boost rates at its next meeting on June 29-30 by another quarter point and keep raising rates at least through the summer.

When the Fed started boosting rates 10 months ago, the funds rate stood at 1 percent, the lowest level in 46 years.

Many economists believe the Fed will keep raising the funds rate for the rest of the year with more quarter-point moves until it reaches a “neutral” point for the funds rate, the level where the rate is neither stimulating economic growth nor depressing growth.

The Fed has never said exactly where neutral is but many economists believe it could be around 4.25 percent.