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March 28, 2005

Short-term interest rates raised by U.S. Federal Reserve

WASHINGTON

The U.S. Federal Reserve, concerned that soaring energy prices could stoke broader inflation, boosted short-term interest rates last week and signalled rates would probably keep on rising in the months ahead.

Federal Reserve chairman Alan Greenspan and his colleagues, sticking to a course of gradually raising rates, bumped up the federal funds rate by one-quarter percentage point to 2.75 per cent. That marked the seventh increase of that size since the central bank began tightening credit in June 2004.

In a brief statement after their meeting, the Fed policy-makers drew more attention to rising prices than they have in previous assessments, noting that “pressures on inflation have picked up in recent months.’’

Still, they said the increases in energy prices haven’t fed through to “core’’ consumer prices — those for a variety of goods other than food and energy. And, they said, “longer-term inflation expectations remain well contained.’’

Economists viewed the Fed’s overall comments on inflation as slightly more hawkish and believed that suggested further interest-rate increases well into the year.

“The central bank has more work to do to combat possible inflation in the future,’’ said Sung Won Sohn, president and chief economist of Hanmi Bank.

In response to the Fed’s action, commercial banks began lifting their prime lending rates by one-quarter point to 5.75 per cent. This rate, used for many short-term consumer and business loans, moves in lockstep with the funds rate.

The Fed is lifting rates as energy prices are climbing again. Oil prices, which set a new record high recently, are hovering above $56 (U.S.) a barrel. That’s helping to propel gasoline prices sharply higher.

More expensive energy and food were the culprits behind wholesale prices rising 0.4 per cent in February, the most in three months. However, “core’’ prices — which exclude energy and food — inched up 0.1 per cent.

For now, the Fed decided to keep language it has used with every rate increase, saying that future rate increases would occur “at a pace that is likely to be measured.’’ Measured has come to be viewed as quarter-point bumps.

A few economists thought that language might be dropped at last week’s meeting. Some believe it might be dropped at a subsequent meeting, perhaps at the next Fed gathering on May 3 or the meeting on June 29-30.

The Associated Press

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