WASHINGTON -- The Federal Reserve raised interest rates by a quarter point Tuesday, boosting a key rate for the third time this year in an effort to slow the sizzling U.S. economy and keep inflation from becoming a problem.
The announcement came after a closed-door meeting of the Federal Reserve Open Market Committee, which sets interest rate policies.The Fed said it was increasing its target for the federal funds rate -- the interest banks charge each other on overnight loans -- to 5.5 percent from 5.25 percent.
It also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by a quarter point to 5 percent.
"Although cost pressures appear generally contained, risks to sustainable growth persist," the Fed said in a statement.
Fed policymakers said that while there had been some slowing of economic activity, they were worried that the pace of growth "continues in excess of the economy's growth potential."
Stock prices surged after the Fed announcement but fell back later in the session. The Dow Jones Industrial Average, which had been up nearly 90 points in anticipation of the Fed action, rose more than 130 points. It was ahead 60 points at 10,870.20 in mid-afternoon trading. U.S. Treasuries fell.
The result in Treasuries is that "everything will reprice 5 to 10 basis points higher in yield" said Bill Quan, an economist at Aubrey G. Lanston & Co. "We could see two-year notes at 5.88 percent," compared with current yields of 5.82 percent, and 30-year yields at 6.12 percent from 6.03 percent, he said.
The 30-year bond fell 1/8, or $1.25 per $1,000 face amount, to a price of 1011/4.
Analysts had been split over whether the Fed would change rates, saying there were valid arguments for a rate increase and for leaving rates unchanged, as was done in October.
Many private economists had said they couldn't remember a time when the Fed faced such a close call.
Fed watchers had cited several reasons that would justify another quarter-point bump-up in short-term interest rates. The red-hot economy grew at a 4.8 percent annual rate in the third quarter, far above the 3 percent rate many Fed policy-makers believe prudent in today's tight labor market. Another rate increase would help slow the economy.
Separately, the Federal Reserve in a report today said industrial production at the nation's factories, utilities and mines surged in October, rebounding from the hurricane that had depressed production by 0.1 percent the month before.
William Gross, manager of the world's largest bond fund, last week said the surge in stocks made a rate increase more likely. "We have the makings of a bubble, if a bubble doesn't already exist" in U.S. stocks, said Gross, who oversees about $180 billion of bonds at Pacific Investment Management Co. in Newport Beach, California.
Still, the Fed has been patient and allowed the economy to grow faster than it once might have, and central bankers have cited recent gains in worker productivity as one reason inflation has showed few signs of actually picking up this year.