Fed raises rate to 1.25 percent,<br> maintains ‘measured’ pace

Federal Reserve policy-makers raised
the U.S. benchmark interest rate by a quarter-point to 1.25
percent and reiterated that further increases can come at a
“measured” pace, as long as inflation remains “relatively
low.”

The first increase since May 2000 came on a unanimous vote, a
sign that no Federal Open Market Committee member saw enough of an
inflation threat to seek a more aggressive move. Economic
developments that threaten stable prices may cause them to change
their gradual approach to raising rates, the policy-makers said.

“With underlying inflation still expected to be relatively
low, the committee believes that policy accommodation can be
removed at a pace that is likely to be measured,” members of the
FOMC said in a statement following their two-day meeting in
Washington. “Nonetheless, the committee will respond to changes
in economic prospects as needed to fulfill its obligation to
maintain price stability.”

The Fed is changing course after a year of holding the
overnight bank lending rate at the lowest since 1958 to ward off
deflation and revive a job market that lagged after the 2001
recession. Thirteen cuts took the rate from 6.5 percent in January
2001 to 1 percent last June, the fastest plunge in Alan
Greenspan’s 16-year tenure as chairman. The U.S. has added 1.2
million jobs this year and some inflation gauges have risen.

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“Although incoming inflation data are somewhat elevated, a
portion of the increase in recent months appears to have been due
to transitory factors,” the statement said. The FOMC said the
risks to growth and inflation for the next few quarters are
“roughly equal.”

Bloomberg News