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Fed raises rates, one voter dissents

Posted on: Tuesday, 20 September 2005, 14:50 CDT

By Glenn Somerville

WASHINGTON (Reuters) - The Federal Reserve raised U.S. interest rates on Tuesday for an 11th straight time, signaling more increases to come and saying Hurricane Katrina will provide only a temporary setback to the broad economy.

But Fed Board Governor Mark Olson dissented from the rate-rise vote, saying he preferred to hold borrowing costs steady. This was the first such dissent since June 2003.

In a nine-to-one vote, the policy-setting Federal Open Market Committee opted to increase the benchmark federal funds rate charged on overnight loans between banks a quarter of a percentage point to 3.75 percent.

In a statement outlining its decision, the Fed said U.S. spending, production and employment will suffer a near-term knock from Katrina and that energy prices may be elevated and volatile.

"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat," the FOMC said in a statement.

Analysts said policy-makers clearly served notice they were not yet done raising rates. "The Fed is on course to tighten and has not been swayed," said currency strategist T.J. Marta of RBC Capital Markets in New York.

Economist Robert Walters of Quicken Loans in Livonia, Mich., agreed. "The Fed is sticking to its guns," Walters said. "They took pains to address the tragedy of Hurricane Katrina, but they also made it clear that they see it as a short-term event from the economic perspective."

Investors apparently agreed. Within an hour of the announcement, the Dow Jones industrial average was off about 70 points, or 0.65 percent, and the high-tech Nasdaq composite index was down about 11 points or 0.53 percent, as conviction set in about more rate rises to come.

Bond prices, which typically suffer when rates rise, were generally lower. The benchmark 10-year Treasury note fell 4/32 to yield 4.26 percent, after ending at 4.25 percent on Monday.

The fed funds rate now stands at its highest level since June 2001, though market-set long-term rates remain low by historical standards.

"Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained," the Fed said.

By the time the meeting convened on Tuesday, earlier speculation that the damage wrought by Katrina might prompt a hiatus in the rate-rise campaign had died down and an increase was widely expected.

The hurricane that struck August 29 killed more than 900 people in five states and disrupted oil production and distribution. The estimated cost of rebuilding has run as high as $200 billion or more.

Some data have shown that consumer confidence and spending suffered in the immediate wake of the storm. The University of Michigan's consumer sentiment index fell to a 13-year low in September and other surveys have shown U.S. chain-store sales under pressure.

Costlier energy is one factor making the Fed wary.

Oil prices, already high before Katrina, jumped to a record $70.85 a barrel right after the storm. On Tuesday they slipped to around $66, although a new storm approaching the Florida Keys was worrying traders.

The U.S. economy is still growing despite higher oil prices, but the Fed is keeping a close watch to see how costlier energy is affecting broader prices.

In the statement outlining its action, the Fed said with appropriate monetary policy, upside and downside risks to its twin goals of sustainable growth and price stability should remain "roughly equal."

In concert with its action on the key overnight rate, the Fed lifted the largely symbolic discount rate a matching quarter-point to 4.75 percent.

Source: REUTERS

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