Fed Boosts Rates a Quarter Point

Wall Street stocks remained in the doldrums this morning as investors awaited the end of a Federal Reserve meeting that is expected to result in this year’s third interest rate hike.

BULLETIN

The Federal Reserve boosted a key short-term interest rate by one-quarter percentage point today, marking the third increase this year. It’s part of a gradual process to wean the economy from extraordinarily low rates that are no longer viewed as necessary to keep the economy afloat.

The New York Stock Exchange was up a few points in late morning trading. The Nasdaq and S&P 500 were also nominally higher.

Investors and economists widely expect the central bank’s policy makers to raise the bench-mark federal funds rate a quarter-percentage point to 1.75% — the third in a series of incremental rate hikes from historic lows. The Federal Open Market Committee last raised the federal funds rate a quarter percentage point on Aug. 10.

Despite signs of economic weakness, Fed chairman Alan Greenspan and his fellow central bankers have shown no signs of wavering from their plan to gradually raise rates to moderate growth and snuff out inflation. In previous comments, Greenspan has described the slowing in economic activity this summer as only temporary and the result primarily of a spike in energy prices.

However, many investors and analysts have become more pessimistic about the economy and have scaled back their expectations of economic and job growth for the remainder of the year. Those expectations of lackluster growth might explain why rates on mortgages, credit cards and other debt have actually sagged this summer despite the increase in the federal funds rate, which is the rate banks charge each other for short-term loans.

In theory, increases in the federal funds rate will reverberate throughout the economy since so many lending rates on everything from credit cards, home equity loans and adjustable-rate mortgages are in some way linked to changes in the Fed’s benchmark rate.

While the central bank is expected to push rates higher, investors and economists will scour today’s statement by the Federal Open Market Committee for any clues as whether the Fed might become more cautious about future increases.

The central bank’s decision to gradually raise rates reflects its view that the economy has turned itself around and is no longer in need of super-low rates to stimulate growth. The Fed was also prompted to raise rates in response to growing concerns that price inflation might be getting out of hand, said economists.

However, there are many economists who worry if the higher rates will undermine consumer spending — the largest driver of economic growth — and the housing market, particularly in high-priced places like California.

Under Greenspan’s leadership, the Fed Reserve has steadily cut its rate from 6.5% in 2000 to 1% by last June to prop up an economy hit by tumbling stock prices, the 2001 terrorist attacks, corporate scandals and the Iraq war.

In other economic news today, the Commerce Department said that residential construction activity picked up in August. Housing starts rose 0.6% from July’s revised figures to a seasonally adjusted annual rate of 2 million units. However, building permits, a sign of future construction activity, in August fell 5.5% from July to a seasonally adjusted, annual rate of 1.95 million.