Fed Raises Benchmark Rate Again

Insisting that the economy was still getting stronger, the Federal Reserve raised its benchmark short-term interest rate again yesterday, to 3.5 percent, from 3.25 percent. It was the 10th increase in 12 months.

“Aggregate spending, despite high energy prices, appears to have strengthened since late winter,” the Fed said in a statement, “and labor market conditions continue to improve gradually.”

“Inflation is well contained, under control,” Ben Bernanke, chairman of the Council of Economic Advisers, told reporters. “The core inflation rate over the last year is about 2 percent, and I see inflation remaining well-contained going forward.”

The Fed reiterated that it planned to raise short-term rates at a “measured” pace, a term that is widely thought to mean that it would continue to move in quarter-point increments. Many expect the benchmark federal funds rate to reach 4.25 percent by the end of the year, which would require the Fed to lift the rate at each of its three remaining meetings in 2005.

In the spring, when economic growth looked weaker than it has recently, investors were betting that the key rate would end the year at 3.75 percent.

The housing boom, a recovery in business investment and strong consumer spending have kept the economy growing at a steady pace despite oil prices that have reached the highest levels since the early 1980s.

“Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained,” the Fed statement said, “but pressures on inflation have stayed elevated.”

Using the same words it did at its last meeting, the Fed called productivity growth “robust.” President Bush praised the economy over all, saying that job growth was strong and that trade agreements were opening new markets. But his advisers struggled to explain why, if the economy was improving, public confidence remained shaky, as numerous polls show it does.

Allan Hubbard, director of the National Economic Council, said that most people “in terms of their personal finances, feel very good about the economy. At the same time, there is unease about the economy in general. None of us are comfortable paying $2.50 per gallon when we go to fill up our cars with gas.” And, he said, “we are a nation at war.”