The U.S. central bank Tuesday continued its pattern of raising short-term interest rates at a measured pace, boosting the overnight fed funds rate - what banks charge each other - by one quarter percent.
The Federal Reserve raised interest rates a quarter percentage point on Tuesday. This brings the fed funds rate to 2.75 percent. It is the seventh consecutive quarter point rate increase since the Federal Reserve began to boost the cost of credit nine months ago.
With higher oil prices creating inflationary pressure, analysts were unsure whether the Federal Reserve would hold to its view that interest rates would continue to rise at a measured pace. The Fed did retain that language while making a new reference to mounting inflationary dangers. That subtle change leads former central bank official Alan Blinder to predict that in the future short-term rates might go up not by one-quarter percent but by one-half percent in order to fight inflation pressures.
"I would say that in a mild way [Federal Reserve Board Chairman] Alan Greenspan and company are showing their teeth," said Alan Blinder. "They're growling a little bit. The measured pace is still in there."
About every six weeks the Federal Reserve meets to consider changes in short-term rates. After each meeting, it issues a statement that is studied carefully by Fed watchers like Mr. Blinder, an economics professor at Princeton University.
Higher short-term interest rates translate into higher monthly payments for consumers who make purchases with credit cards. Short-term rates as recently as last year were at their lowest levels in 40 years. In the aftermath of recession and the 2001 terrorists attacks, the Fed aggressively lowered rates in an effort to encourage economic activity.
Low interest rates have had the intended effect as the economy has been growing at a four percent annual rate. However, low rates have fueled a boom in the housing market that some analysts say bears disturbing parallels to the bubble in high technology stocks five years ago.