clock menu more-arrow no yes

Filed under:

Fed again raises interest rates as Greenspan retires

WASHINGTON — The Federal Reserve on Tuesday nudged a key interest rate up to the highest level in nearly five years and left the door open for possibly one more rate hike as Alan Greenspan brought his long tenure as chairman to a close.

At Greenspan's final meeting, the central bank voted to boost its target for the federal funds rate to 4.5 percent. It was the 14th quarter-point move in a credit-tightening campaign that began 19 months ago.

The increase will raise borrowing costs for millions of American consumers and businesses as banks were expected to quickly boost their prime lending rates by a similar quarter-point. The prime rate stood at 7.25 percent before Tuesday's Fed meeting.

Many private economists believe the Fed is likely to raise rates at least one more time, at its next meeting on March 28. But the Fed modified its statement on Tuesday to give Greenspan's successor, Ben Bernanke, more leeway.

Bernanke, a former Fed board member who since last summer has been President Bush's chief economic adviser, was confirmed by the Senate on Tuesday within moments of the Fed's rate announcement.

Bernanke will take over on Wednesday as the Fed's 14th chairman since the central bank was created in 1913.

The Fed modified Tuesday's statement to say that "some further policy firming may be needed" to keep inflation under control. That was a slight change from the December meeting when it had said that "measured policy firming is likely to be needed."

Analysts said the minor change was made to avoid limiting Bernanke's policy options. But they also said they still expect Bernanke will raise rates by one last quarter-point to 4.75 percent as a way of signaling to financial markets that he intends to be as tough an inflation-fighter as Greenspan.

"I think there will be one more quarter-point hike and then the Fed will go on hold for the rest of the year," said David Jones, chief economist for a Denver-area consulting firm.

The goal of the central bank has been to push interest rates up as a way of slowing the economy and making sure that low inflation — probably Greenspan's biggest legacy — will remain under control.

To commemorate Greenspan's final day, photographers and television camera crews had been allowed in for the first time to photograph a portion of the meeting of the Federal Open Market Committee, the panel of Fed board members and regional Fed bank presidents who meet eight times a year behind closed doors to set interest rates.

Beyond presiding the latest Fed monetary policy statement, Greenspan took a low-key approach to his last meeting. He and his colleagues ignored pleas by photographers to turn toward the cameras during the rare picture-taking opportunity. The requests elicited chuckles from the group.

Greenspan plans to open his own economic consulting business to be called Greenspan Associates. He has already selected office space in Washington.

The Fed has been aiming for a neutral federal funds rate — a level where the economic growth is not being stimulated or held back — and many analysts believe that is somewhere below 5 percent.

Many economists believe the Fed will stop raising rates with one more increase to 4.75 percent on March 28.

On the Net:

Federal Reserve: