Fed Lifts Rates a Quarter Point, As Economy Gains 'Traction'; Policy Makers Say Fears Of Inflation Have Eased During Recent Months
WASHINGTON -- The Federal Reserve raised its key short-term interest rate by a quarter of a percentage point to 1.75%, saying the U.S. economy "appears to have regained some traction" after "moderating earlier this year."</br></br>The Fed said nothing to dissuade financial markets from anticipating another quarter-point rate increase before year end.</br></br>The Fed's campaign to lift interest rates is intended not to slow the economy, but to raise rates from emergency lows in order to avoid creating an inflation problem in the future. The target on the federal-funds rate, at which banks lend to each other overnight, was chopped to a 45-year-low of 1% in mid-2003 from 6.5% at the start of 200. With much advance warning, the Fed began lifting rates in June.</br></br>The economy now appears to have pulled out of a "soft patch" -- as Federal Reserve Chairman Alan Greenspan has put it -- that was largely the result of higher oil prices. After substantial hesitation, employers are hiring, adding more than one million jobs since the low point in August 2003, though payrolls remain one million shy of the March 2001 peak. Following disappointing second-quarter growth of 2.8%, the U.S. economy now is expanding at better than 3.5%, perhaps as strong as 4%, private economists estimate.</br></br>But recent declines in long-term bond yields suggest the bond market may not be as optimistic. The yield on the 10-year Treasury note fell to 4.05% yesterday, well below June's 4.87%; yields fall as bond prices rise. Stocks rallied. The Dow Jones Industrial Average ended at 10244.93, up 40.04, most of that after the Fed spoke.