The Federal Reserve, attempting to squelch inflation before it gets started, Tuesday raised short-term interest rates for the fifth time this year, by a half-point.
After a closed-door meeting of its policy-setting Federal Open Market Committee, the central bank issued a statement indicating it was pushing up two key interest rates.
The benchmark federal funds rate, which banks charge each other on overnight loans, was increased to 4.75 percent from 4.25 percent. The discount rate, which the Fed charges on its own loans to banks, was raised to 4 percent from 3.5 percent.
The increases are expected to filter quickly through to rates charged millions of American borrowers on everything from home equity loans to credit cards.
In fact, within minutes after the Fed’s announcement, banks began raising their prime lending rate to 7.75 percent from 7.25 percent.
“The actions are intended to keep inflationary pressures contained and thereby foster sustainable economic growth,” the Fed said in its statement.
The moves bring the discount rate and the federal funds rate to the highest level since December 1991. Before the Fed began tightening monetary policy in February, both rates had been at a three-decade low of 3 percent.
The Fed indicated it is through raising rates for now.
“These actions are expected to be sufficient, at least for a time, to meet the objective of sustained, non-inflationary growth,” its statement said.
So far this year, inflation has remained subdued. Through July, prices rose at a rate that, if continued, would match last year’s 2.7 percent. But Fed Chairman Alan Greenspan repeatedly has stressed that interest-rate changes affect the economy with long lags and that he is seeking to forestall inflation next year rather than trying to squelch price increases occurring now.
“It’s kind of like duck hunting,” said economist Sung Won Sohn, of Norwest Corp., in Minneapolis. “You aim ahead of the duck, not at the duck. The same is true of inflation. You have to act in advance.”
Sohn said the move by the Fed was encouraging to financial markets because it likely means no further rate hikes for the rest of this year. That could provide room for longterm rates to head lower, he said.
The Fed’s actions took place after the Commerce Department said housing starts rose modestly in July after a big drop in June.
Starts on new homes rose 4.7 percent to a seasonally adjusted annual rate of 1.42 million units after a revised drop of 9.4 percent in June.
Applications for permits to build new homes also increased moderately in July after two straight monthly declines, gaining 2.1 percent to a seasonally adjusted annual rate of 1.34 million.
Regionally, housing starts fell sharply by 10.3 percent in the Northeast to an annual rate of 122,000 units. In the South, they were down slightly by 0.7 percent to a rate of 592,000 units.
But in the Midwest, construction starts shot up by 14.1 percent to an annual rate of 340,000 units. In the West they gained solidly by 12.5 percent to a rate of 361,000 units.
Before the Fed’s action on interest rates, some members of Congress urged the central bankers to take no further action against inflation.
