U.S. Central Bank Boosts Key Interest Rates, Signals Change
Federal Reserve suggests possible end of tightening policy in near future
The policy-making group of the U.S. Federal Reserve, the U.S. central bank, has raised a key interest rate a quarter percentage point for the 13th time in a row going back to June 2004, but indicated that its tightening of monetary policy might be coming to an end in the near future.
As widely expected, the Federal Open Market Committee (FOMC) decided unanimously to raise the federal funds rate -- the rate banks charge one another for overnight loans -- to 4.25 percent, the highest level since May 2001.
In a December 13 statement, committee members signaled, however, that their 18-month-long policy of incremental interest rate increases, instituted to sustain economic growth while keeping inflation in check, is likely to end some time in the near future.
They left out language regarding lessening of “policy accommodation” that had indicated their intended action in many previous interest-rate-raising statements. Instead, they said that “some further measured policy firming is likely to be needed” to achieve a neutral policy, which aims at sustaining economic expansion without increasing inflationary pressure. This language, financial experts say, suggests that unless the economy experiences new shocks, the central bank intends to stop pushing interest rates up after one or two more increases.
The FOMC meeting was preceded by better-than-expected economic news, a factor noted by its members. The U.S. economy grew at a 4.3 percent annual pace in the third quarter and core inflation, which excludes volatile food and energy prices, has stayed relatively low in recent months despite the effect of September’s catastrophic storms in the U.S. Gulf region.
The FOMC also raised by a quarter point, to 5.25 percent, the discount rate -- the interest rate the Federal Reserve itself charges banks for overnight loans.
Following is the text of the FOMC statement:
(begin text)
Board of Governors of the Federal Reserve System
[Washington, D.C.]
Press release
December 13, 2005
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.
Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges 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. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
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(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)