The U.S. Federal Reserve has raised interest rates for the second time this year, acting to prevent the economy from growing too rapidly despite recent evidence of a slowdown.
The central bank raised the overnight federal funds rate a quarter-point to 1.5 percent, slightly increasing borrowing costs for many businesses and consumers. The move, which had been widely anticipated, came despite a startling report that the economy created just 32,000 jobs in July, far short of the 220,000 or so that forecasters were expecting. It was the second straight month of weak job growth and raised the possibility that what Fed Chairman Alan Greenspan has described as an economic "soft spot" is lasting longer than anticipated.
Because the employment report came out so soon before meeting of Mr. Greenspan and fellow policy-makers, the Fed had little choice but to follow through on its previously stated plan to continue with a "measured" series of rate hikes, analysts said. Anything else could have by given financial markets the impression the Fed was worried about the possibility of a further slowdown.
Financial market participants were convinced that the Fed planned to raise rates and felt a failure to act would raise "a credibility issue" for the central bank and potentially cause "substantial" damage to the economy by causing a sell-off in the stock market, said Lynn Reaser, chief economist for Banc of America Capital Management.
Despite the weak employment figures, most analysts believe the economy is in relatively good shape based on a range of other indicators, including rising business and consumer confidence and early evidence of stronger retail sales in July.
But some analysts believe the Fed may choose to leave rates unchanged at the next scheduled meeting of policy-makers Sept. 21, especially if the August employment report is weak. That likely would leave rates unchanged until after the presidential election because the Fed's policy-making Open Market Committee is not scheduled to meet again until Nov. 10.
The Fed lowered rates 13 times from January 2001 through June 2003, bringing the benchmark overnight rate to its lowest level in 46 years in an effort to stimulate the economy after the end of the nation's longest postwar expansion. Some analysts say the tremendously low rates are no longer needed, especially now that the threat of deflation appears to have passed, and with it a dangerous the risk to the stability of the banking system. (MSNBC.com)
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