THE ECONOMY Fed raises interest rates for third time in a year

Some economists expect interest rate increases into next year.
WASHINGTON (AP) -- Federal Reserve policy-makers boosted interest rates for a third time this year, and economists believe there probably will be another increase before the year is over depending on how the economic expansion unfolds.
Fed Chairman Alan Greenspan and his colleagues pushed up the target for the federal funds rate to 1.75 percent on Tuesday, the third quarter-point upward jog since June. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.
With the economic expansion moving forward and inflation largely under control despite surging energy prices, the Fed said it can stick with its approach of raising rates gradually.
Reason to move slowly
Economists said the Fed needs to move rates slowly upward from extraordinarily low levels to more normal levels so that should the economy begin growing too fast or inflation appear to pose a problem, the Fed won't have to ratchet up rates rapidly and disrupt Wall Street and Main Street.
"The economy is neither roaring, nor stalling; it's clearly out of the soft patch and moving along at a decent pace, and that's all the Fed needs right now," said Bill Cheney, chief economist at MFC Global Investment Management.
Analysts believe the funds rate will rise to 2 percent by the end of this year. Some believe the Fed will boost rates again on Nov. 10, then stand pat Dec. 14 at its last meeting of the year. Others believe the Fed might take a breather at the November meeting but raise rates in December.
"When we get to around 2 percent, the Fed may well pause for a little bit and see how conditions look," said Richard Rippe, chief economist at Prudential Equity Group LLC. "But if we get pretty good economic growth next year, the Fed will continue to move rates up."
Some analysts foresee the funds rate rising to 3 percent or to 4 percent by the end of 2005, depending on what data at the time say about economic growth and inflation.
Banks' response
In response to the Fed's decision Tuesday, Wells Fargo, SunTrust and other commercial banks said they were increasing their prime lending for many short-term consumer and business loans by a quarter-point to 4.75 percent.
Explaining its unanimous decision, the Fed said the economy, which slowed early this year partly because of soaring energy prices, now "appears to have regained some traction." That echoed a comment Greenspan made to Congress this month.
The Fed also said Tuesday that "labor market conditions have improved modestly." That was a better assessment than the Fed offered in August, when it said job market improvements had slowed.
Companies increased hiring in August, adding 144,000 jobs, the most since May. Still, the economy is down a net 913,000 jobs since Bush took office.