Fed raises rates

The Federal Reserve raised US interest rates on Tuesday for the 12th straight time, taking them to the highest level in more than four years and indicating more hikes will be needed to keep inflation at bay.
The central bank's policy-setting Federal Open Market Committee, expressing concern over potential inflation pressures, voted unanimously to raise the benchmark federal funds rate charged on overnight loans between banks a quarter percentage point to 4 percent.
The move extended a campaign of rate rises the Fed initiated in mid-2004 and took overnight borrowing costs to a level last seen in June 2001.
In a statement outlining its widely expected decision, the Fed described monetary policy as accommodative - its way of saying more hikes are needed - and said recent hurricanes were unlikely to derail the economic expansion.
"Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment," the Fed said in its post-meeting statement.
"However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas," it added.
Once again, the Fed said it was worried high energy prices could add to inflation pressures, although it said inflation outside of food and energy prices, and expectations of future inflation over the long haul were still contained.
"With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," the statement said. The Fed has been aiming to bring short-term rates to neutral - a rate that neither hinders growth nor fires inflation - to sustain the economy's expansion.
Exactly where that level is remains unclear though private-sector analysts speculate it's around 4.5 percent.
Recent comments by Fed policy-makers suggest they still have some ways to go before they will feel comfortable pausing in the rate-hike campaign, which they kicked off in June 2004.
"We are considerably closer to where policy needs to be than we were 16 months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while," Fed Governor Donald Kohn told a Pittsburgh audience two weeks ago.
Costlier energy is one factor making the Fed wary.
Oil prices that had jumped to a record $70.85 a barrel shortly after hurricane Katrina struck in late August were below $60 on Tuesday, but there were still concerns about refining capacity as the prime winter heating season nears.
Meanwhile, economic growth has remained durable in the face of costlier energy and the heavy damage to the US Gulf Coast region caused by Katrina and late-September's Hurricane Rita.
The government said last week that growth in gross domestic product - a gauge of total goods and services output within US borders - accelerated to a 3.8 percent annual rate in the third quarter from the second quarter's 3.3 percent.
So far, higher interest rates do not seem to be affecting a sizzling housing market. The Commerce Department said on Tuesday that construction spending climbed 0.5 percent in September to a record annual rate of $1.12 trillion, largely because of more home building.
In the statement outlining its action, the Fed said upside and downside risks to its twin goals of sustainable growth and price stability remained "roughly equal."
The policy committee also reiterated it would focus on data in making its future rate decisions, even though it thought a gradual course of increases was the most likely outcome.
In concert with its action on the key overnight rate, the Fed lifted the largely symbolic discount rate a matching quarter-point to 5 percent.
The US central bank is widely expected to keep raising rates at least through the tenure of current Fed Chairman Alan Greenspan, which ends in January. The remaining two meetings under the Greenspan era are scheduled for December 13 and January 31.
Betting was about even in futures markets that President George W. Bush's nominee to replace Greenspan, former Fed Governor Ben Bernanke, will oversee one more rate rise in March when he chairs his first policy-setting meeting.