Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter-point to 1.75 percent and restated a plan to carry out any further increases at a ``measured'' pace. ``With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the Fed's rate- setting Open Market Committee said in a statement after their meeting in Washington. ``Nonetheless, the committee will respond to changes in economic prospects as needed.''
The third increase this year and the possibility the FOMC may keep raising rates suggests central bankers are confident that the world's largest economy will continue to expand. The vote to raise the overnight bank lending rate was unanimous. ``This is not a time when the Fed wants to rock the boat,'' said Lyle Gramley, a former Fed governor and now an economic adviser to Schwab Soundview Capital Markets in Washington, in an interview. ``The game plan is working -- the economy is picking up, inflation is going down.'' The U.S. economy hit what Chairman Alan Greenspan called a ``soft patch'' in June and July amid rising energy costs. Crude- oil futures prices rose to $47.10 a barrel in New York as of 2:47 p.m., up from $33.78 in January. ``Output growth appears to have regained some traction,'' today's FOMC statement said, echoing comments Greenspan made to Congress on Sept. 8. ``Labor market conditions have improved modestly. Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.''
Market Reaction
The benchmark two-year Treasury note fell after the Fed said more increases will come at a ``measured'' pace, dropping 1/16 point and pushing its yield up 4 basis points to 2.47 percent at 4:30 p.m. in New York. Longer-dated debt rose on the Fed's reassurances that inflation is under control. The benchmark 10- year Treasury note gained 1/8 point, pushing its yield down 2 basis points to 4.04 percent. The median forecast was a quarter-point increase, based on a Bloomberg News survey of 94 economists. Only two predicted the Fed would remain on hold. ``Things are going pretty much as they expected and there is no need to deviate from their original plan,'' said Edgar Peters, who oversees $17 billion as chief investment officer at PanAgora Asset Management in Boston. ``They want to raise rates 25 basis points a meeting until they get closer to a neutral position. They will continue raising rates well into next year.''
Election Year
The FOMC raised the overnight rate a quarter-point in both June and August after holding it for about a year at 1 percent, the lowest since 1958. The central bankers are trying to restore the rate to a level that will foster growth without accelerating inflation. The rate was last at 1.75 percent in 2002. Today's Fed meeting is the last before President George W. Bush and Democrat John Kerry square off in the Nov. 2 election. Both Bush, 58, and four-term Massachusetts Senator Kerry, 60, have praised Greenspan and urged Fed officials to do what they feel appropriate for the economy. The next policy meeting on Nov. 10 comes eight days after the election. The economy remains the top concern of voters in polls by the Gallup Organization and those conducted for the New York Times and the Washington Post. Employers hired 144,000 workers in August, double the number of new jobs created in July. U.S. housing starts unexpectedly rose for a second month in August, to a 2 million annual rate, the Commerce Department said today.
Inflation
Treasury yields remained low after the Fed started raising rates, as investors anticipated the Fed would slow its pace of subsequent increases amid low inflation. Yields fell since the last Fed meeting, with the 10-year note yielding about 4.06 percent yesterday, down from 4.29 percent on Aug. 10. Low automobile and clothing prices helped hold the rise in the consumer price index to 2.7 percent for the year ended in August, the lowest since April, the Labor Department said last week. The index rose 3 percent in July from a year earlier. The figures supported Greenspan's comment to Congress on Sept. 8 that high oil prices aren't creating inflation for goods and services. One Fed official said last week that policy makers may need to act because letting inflation take hold in an oil shock is the ``worst possible outcome.'' ``It is virtually inevitable that shocks will result in some combination of higher inflation and higher unemployment for a time,'' Fed Governor Edward Gramlich said last week. ``The worst possible outcome is for monetary policy makers to let inflation come loose from its moorings.''
Consumers
The overnight rate is the rates banks charge each other for overnight loans to cover required reserves. The rate ultimately affects the interest consumers earn on bank deposits and money market yields, and indirectly influences consumer borrowing costs such mortgages, car loans and credit cards that are tied to longer- term rates. The average 30-year fixed mortgage rate has declined about a half percentage point since June 30. Consumer spending slowed to a 1.6 percent annual rate in the second quarter, and some economists to cut estimates for third- quarter growth. Gross domestic product may expand at a 3.7 percent annual rate, down from 4.2 percent estimated in July, based on the median estimate the latest Bloomberg monthly poll. ``We just hope the actions will allow economic growth to continue and in fact expand,'' said Bruce Nolop, chief financial officer for Pitney Bowes Inc., the world's biggest maker of postal meters and mailing equipment, in an interview.
Fed History
Greenspan, 78, joined the Fed in 1987 and is now in his fifth term as chairman. During his tenure, the Fed has on average raised the benchmark rate eight times in the first year of each tightening cycle, or at each regularly scheduled Fed meeting. The Fed last raised interest rates in three consecutive moves during a tightening cycle that stretched from June 1999 to May 2000 and took the rate from 4.75 percent to 6.5 percent. After today's decision, traders increased bets the Fed will raise its target rate in November. The yield on November federal funds futures contracts at the Chicago Board of Trade rose 1.5 basis points to 1.885 percent, signaling traders forecast about an 77 percent chance of a quarter-point increase on Nov. 10, up from 71 percent yesterday. The yield on fed fund futures for January delivery rose 3 basis points to 2.03 percent, indicating a 12 percent chance of an increase in December, up from no chance before the meeting. ``If they tighten in November and take us to 2 percent for the Fed Funds rate, I would anticipate that would be the point of pause,'' said Paul McCulley, a managing director of Newport Beach, California-based Pacific Investment Management Co., which manages the world's biggest bond fund. Treasury securities have outperformed stocks this year. The Merrill Lynch U.S. Treasury Master Index, which measures the performance of U.S. government debt, is up 3.37 percent this year through yesterday, compared with a 0.9 percent gain in the Standard & Poor's 500 Stock Index. With its action today, the Fed raised the discount rate it charges banks for direct loans to 2.75 percent, as requested by all 12 regional Federal Reserve banks. The rate is directly linked to the Fed's target. //www.bloomberg.com