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Fed kicks off new year with rate hike

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The Federal Reserve Wednesday kicked off 2005 the way it ended 2004 — continuing a series of quarter-point rate hikes and giving no hint it is anywhere near the end of its tightening cycle.

Fed Chairman Alan Greenspan and his colleagues wrapped up their first meeting of the year by raising the benchmark federal funds rate to 2.5 percent and issuing a statement that was virtually a carbon-copy of their last statement Dec. 14, saying monetary policy "remains accommodative."

It was the sixth increase for the key federal funds rate in a bit more than seven months, bringing it to its highest level since November 2001 and raising a wide range of linked lending rates for businesses and consumers including the prime rate, which banks quickly began raising to 5.5 percent.

The Fed's policy statement, which differed by only a single word from its December offering, provided little insight into the current thinking of central bankers. Analysts said policy-makers wanted to stay out of the limelight, preferring to let Greenspan articulate any changes when he appears before Congress Feb. 16 for his scheduled semi-annual testimony on monetary policy and the economy.

"There was no need to rock the boat," said John Silvia, chief economist at Wachovia Corp. "Whatever he's going to say, he's going to say in the testimony."

Silvia said that at some point Greenspan and his colleagues are going to have to be more direct about the threat of rising inflation, which presumably is behind the steady tightening of credit. The Fed's policy statement, however, currently continues to say that the risks that growth will slow or inflation will rise are "roughly equal" and that rates can be raised at a "measured" pace.

After aggressively cutting rates from 2001 through 2003, central bankers are trying to move rates back to a so-called neutral stance where the funds rate is neither stimulating growth nor holding the economy back. There is debate in economic circles about where the neutral level is. However, many economists believe it is somewhere between 3.5 percent and 4.5 percent for the federal funds rate.

"They are being transparent," said Sung Won Sohn, an economist and chief executive of Hanmi Bank in Los Angeles. "They are doing what they said they would do."

"The Fed is taking its foot off the accelerator without hitting the brakes," said Richard DeKaser, chairman of an American Bankers Association panel of economists that meets twice a year with Fed policy-makers to give them their views of where the economy is headed.

If the Fed keeps increasing rates by a quarter-point at each of the eight scheduled meetings this year, the funds rate would be at 4.25 percent at the end of this year, a level where many analysts believe Greenspan will feel good about stepping down in January 2006 when his term as a Fed board member ends.

"I think Greenspan really would like to leave his successor with no work to do," said David Wyss, chief economist at Standard & Poor's in New York.

But Wyss and other economists believe the pace of the Fed's credit increases will depend on how the economy performs.