*EPF312 06/30/2004
Text: Key U.S. Interest Rates Raised as Economy Keeps Growing
(But U.S. central bank says its policy remains accommodative) (610)

A key U.S. interest rate was raised for the first time in four years by the policy-setting group of the U.S. central bank, marking the end of an era of the lowest borrowing costs in more than 40 years.

In a June 30 statement, the Federal Open Market Committee (FOMC) of the Federal Reserve System said it decided to raise the federal funds rate -- the rate banks charge one another for overnight loans -- by 0.25 percentage points to 1.25 percent. In a related action the Board of Governors raised the discount rate -- the rate the Federal Reserve charges banks for loans -- by 0.25 percentage point to 2.25 percent.

Nevertheless, the committee said it believes that, even after its action, the "stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity."

The committee said it believes that with inflation expected to be relatively low, it will be able to adopt any further rate increases at a pace that is "likely to be measured".

It signaled, however, that it is ready to move more aggressively in response to changes in economic prospects.

The FOMC also cited recent economic data indicating continued U.S. economic expansion and improved market conditions to justify its moderate action. It acknowledged "somewhat" elevated inflation data but said a portion of the increase has been caused by "transitory" factors.

In June, the core inflation index rose by 1.7 percent over the year, according to the Federal Reserve.

The U.S. economy grew 3.9 percent in the first quarter of 2004 and has created 1.2 million jobs since the beginning of 2004, according to data released by the Commerce and Labor departments.

Following is the text of the FOMC statement:

(begin text)

Federal Reserve Board

FOMC statement

June 30, 2004

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.

In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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