Federal Reserve raises short-term interest rates

WASHINGTON -- With the economy moving ahead and the nation's payrolls picking up a bit, Federal Reserve policy-makers boosted short-term interest rates for a third time this year -- the last chance to do so before the November election six weeks away.

Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues -- the group that sets interest-rate policy -- increased the target for the federal funds rate from 1.50 percent to 1.75 percent. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.

Reacting to the Fed's decision, Wells Fargo and SunTrust Bank said they were increasing the prime lending for many short-term consumer and business loans from 4.50 percent to 4.75 percent. Other commercial banks also followed suit.

The Fed, explaining its unanimous decision, said the economy -- which slowed earlier this year partly because of soaring energy prices -- now "appears to have regained some traction." That echoed a comment Greenspan made to Congress earlier this month.

In another encouraging note, the Fed said, "Labor market conditions have improved modestly." That was a better assessment than the Fed offered in August, when it said job market improvements had slowed.

"The Fed is sending a message of relative comfort with the current condition of the economy," said Lynn Reaser, chief economist at Banc of America Capital Management. "They suggested we are pulling out of the soft patch."

On Wall Street, the Dow Jones industrials gained 40.04 points to close at 10,244.93.

The Fed's rate increase came exactly six weeks from Election Day. President Bush and his Democratic rival, John Kerry, hold widely divergent views of the health of the economy and the job market.

Incumbent politicians normally are unhappy if the Fed raises interest rates close to an election.

Yet, some economists said that by raising rates, the Fed could be viewed as appearing comfortable about the pace of the economy's expansion, which could be seen as good for the Bush campaign.

Other economists said that if the Fed had dropped its gradual rate-raising approach and unexpectedly passed on a rate increase in September, it might have looked politically motivated.

"I think what they needed to do so close to the election is not stray from the path that they had set out," said Carl Tannenbaum, chief economist at LaSalle Bank. "Maintaining their course for rates is the wisest thing to do both economically and politically."

The Kerry campaign, while not commenting on the Fed's decision, used the opportunity to say that it has been the "wrong choices of President Bush over four years that has most squeezed the pocketbooks of middle class families."

Treasury Secretary John Snow, meanwhile, contended that the president's economic policies helped the economy rebound from recession. Bush's tax cuts "gave our economy the oxygen it needed to right itself," Snow said.

The Fed's rate-raising campaign began in June when the central bank ordered its first rate increase in four years. Since then, the Fed raised the rates in August and then Tuesday.

Fed policy-makers stuck to their view that future rate increases would be gradual because inflation is expected to remain relatively low. Inflation has eased in recent months despite the rise in energy prices, the Fed said.

Analysts believe the funds rate will rise to 2 percent by the end of this year. Economists, however, have mixed opinions on how additional rate increases will unfold. Some believe the Fed will boost rates again on Nov. 10, then stand pat Dec. 14, its last meeting of the year. Others believe the Fed might take a breather at the November meeting but raise rates in December.

The economy is expanding and no longer needs the support of ultralow interest rates, economists said.

There have been some signs the economy is gaining momentum:

--Housing construction climbed in August to an annual rate of 2 million units, the highest since March, the Commerce Department reported Tuesday.

--Companies, meanwhile, increased hiring in August, adding 144,000 jobs, the most since May. Still, the economy is down a net 913,000 jobs since Bush took office.

Private economists believe the economy, which grew at a 2.8 percent annual rate in the second quarter of this year, expanded at a 3 percent to 4 percent pace in the July-to-September quarter.

Even with the latest increases, both the funds rate and the prime rate remain low by historical standards. Before the Fed ordered its first rate increase of the year in June, the funds rate had been kept for a year at 1 percent, a 46-year low, to support the economy.

A series of 13 rate reductions from January 2001 to June 2003 left the funds rate at 1 percent as the Fed battled to help an economy staggered by a series of blows: a plunging stock market, the 2001 recession, terror attacks and two wars.