Fed raises rates again

Greenspan & Co. boost short-term rates to 4.25% but signal that an end to rate hikes is in sight.

December 13, 2005: 2:30 PM EST
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - The Federal Reserve raised the target for a key short-term interest rate Tuesday by a quarter of a percentage point. The rate hike was widely expected by investors and economists as the economy continues to show signs of strength.

But the central bank also modified its closely-watched policy statement, a move that many analysts believe is a sign that the Fed may finally be nearing an end to its campaign of boosting interest rates.

The Fed did keep the term "measured", a word it has used to describe its approach to monetary policy since its May 2004 meeting. But it got rid of the phrase "policy accommodation can be removed," language that Fed watchers have typically interpreted to mean that many more rate hikes were on the way.

Instead, the Fed said that "some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance" and added that "the Committee will respond to changes in economic prospects as needed to foster these objectives."

The Fed also indicated that inflation was something it was still keeping a close eye on, but added that "core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained." The Fed used the same language to describe inflation in its last statement in November.

The Fed also said that higher energy prices this year and the effects of Hurricanes Katrina, Rita and Wilma did not appear to be having a major negative impact on economic growth. "Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid," the Fed said.

Ethan Harris, chief U.S. economist with Lehman Brothers, said that the Fed probably has room to raise interest rates a few more times since the economy has shown no significant signs of weakening despite some obstacles.

"It's a Reggie Bush economy, running around and leaping over all problems," said Harris, referring to the Heisman Trophy winning USC running back known for his uncanny ability to escape would-be tacklers.

Stocks, which were mixed before the announcement, moved higher following the Fed's decision. Bonds were trading slightly higher, pushing the yield on the 10-year Treasury note to 4.54 percent. (Bond prices and yields move in opposite directions.)

The Fed has increased rates by a quarter of a point at its past thirteen meetings, dating back to June 2004. The federal funds now rate stands at 4.25 percent, its highest level since March 2001. Banks use the federal funds rate in order to determine overnight lending rates, which impact how much consumers and businesses pay for various types of loans.

Tuesday's meeting is the second-to-last for Federal Reserve chairman Alan Greenspan, whose term will end in January. Ben Bernanke, a former Fed governor, will take over for Greenspan and his first policy meeting as Fed chair will take place on March 28.