Fed Moves To Block Inflation

WASHINGTON, D.C.: After weeks of increasingly blunt hints from Fed Chairman Greenspan, the Federal Reserve pulled the trigger Tuesday, announcing a quarter-point increase in interest rates. The central bank raised its federal funds rate, the rate charged for overnight loans between banks, from 5.25 percent to 5.5 percent. That should lead to a corresponding increase in the prime rate from 8.25 percent to 8.5 percent, and in turn a hike in the rates of the millions of consumer and business loans that are linked to the prime. Despite criticism that at its current 2.3 percent rate, inflation is quiescent, Greenspan thinks a rise is necessary to counter the inflationary pressures of high demand and low unemployment. The Fed hopes tightening credit will produce a 'soft landing' for the nation's economy by slowing growth. Because Greenspan had hinted for months that a rise might be coming, Wall Street's reaction to the news was mild. Wondering whether the Fed would raise rates again at its May meeting, investors reversed a 47-point gain and sent prices back down for a 29 point dip by day's end. The yield on the 30-year Treasury bond, used in determining consumer and business lending rates, increased only slightly, rising to 6.95 percent from Monday's 6.92 percent. For a tricky balancing act, it was a solid first day. If the Fed succeeds in creating a "soft landing," it will be only the third in the central bank's 84-year history. Most previous attempts to ratchet down growth have ended in economic downturns. Greenspan is counting not on the historical odds but the immediate precedent from his own era: when he raised rates in 1994 to slow growth, the tactic worked.