Fed Boosts Key Interest Rate for 11th Time

9-20-05 - The Federal Reserve on Tuesday boosted a key interest rate for the 11th straight time and signaled that more rate hikes were likely even as the country recovers from the devastating effects of Hurricane Katrina.

The action pushed the Fed's target for the federal funds rate _ the interest that banks charge each other_ to 3.75 percent. That's the highest level since the summer of 2001.

Some economists had believed that Katrina, the country's costliest natural disaster, might prompt the Fed to pause temporarily in its campaign to drive interest rates higher to keep inflation in check. But Federal Reserve Chairman Alan Greenspan and his colleagues said that Karina's impact on the overall economy was likely to be short-lived.

In a brief statement explaining the action, the Fed said that all the problems from Katrina "will be a setback in the near term" for the economy. But the Fed said it did not believe that Katrina would pose a "more persistent threat" and therefore believed it needed to continue raising interest rates to guard against inflation.

However, the central bank's decision was not universally supported. Fed Governor Mark Olson cast a lone dissenting vote, with the Fed explaining that he preferred to leave rates unchanged at Tuesday's meeting.

The Fed's rate hike is likely to spur commercial banks around the country to increase their prime rate by a quarter-point. That would push the prime, the benchmark for millions of consumer and business loans, to 6.75 percent, its highest point in more than four years.

The federal funds rate stood at a 46-year low of 1 percent when the Fed began raising interest rates in June 2003. Since that time, it has boosted rates at all of its regularly scheduled meetings.

The central bank signaled in its statement that more rate hikes could be expected by retaining language it has used in the past to describe the current level of interest rates as "accommodative."

Fed policy-makers also kept language stating that they believed rates could be raised "at a pace that is likely to be measured." That language is viewed as signaling further gradual quarter-point rate hikes.