Fed boosts interest rates a quarter-point

The Federal Reserve raised short-term interest rates for the third time in three months Tuesday, saying the economy has “regained some traction” after a slowdown earlier this year. The quarter-point rate hike, which increases borrowing costs for consumers and businesses, signals that Fed Chairman Alan Greenspan and his colleagues are comfortable that the economy has passed through the so-called “soft patch” of slow growth, even if the pace of expansion remains modest.

The decision to raise rates, which had been widely expected, was made at the final scheduled meeting of policy-makers before the Nov. 2 election. The Fed offered only a hint as to what it might do next, suggesting to some analysts the possibility of another rate hike in the near future. In a statement, the central bank said policy “remains accommodative” and that policy-makers believe they can continue raising rates at a “measured” pace.

But echoing Greenspan’s Sept. 8 congressional testimony, the Fed noted that “inflation and inflation expectations have eased in recent months,” which could give central bankers the flexibility to move to the sidelines soon.

By acting Tuesday the Fed brought the benchmark federal funds rate to 1.75 percent, compared with a 46-year low of 1 percent before the current tightening cycle began June 30. Leading banks followed suit by raising the prime rate to 4.75 percent from 4.5 percent.

The federal funds rate is what banks charge each other for overnight loans, while the prime is the best rate generally available to consumers and businesses with good credit.

By describing current monetary policy as “accommodative,” policy-makers left plenty of room for additional rate hikes without risking a substantial economic slowdown. But last week’s report that consumer prices barely budged for a third month in a row gives the central bank the flexibility to move to the sidelines without a great fear of inflation, said David Rosenberg, chief North American economist at Merrill Lynch. He said he still expects the Fed to raise rates at its next meeting Nov. 10, but said the decision is not yet a “slam dunk.” While most analysts still expect a rate hike Nov. 10, some disagree as economists debate just when and whether the Fed will pause in its tightening cycle.

Bond markets rallied after the Fed’s afternoon statement, sending long-term interest rates lower on the expectation for continued low inflation. Stock prices rose modestly.