August 10, 2004 11:41 AM PDT

Federal Reserve raises rate by quarter point

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The Federal Reserve raised interest rates by a quarter point to 1.5 percent Tuesday, despite a recent spell of economic weakness.

Although some market watchers had anticipated a slight hike in the overnight interest rate, it was not viewed as a slam dunk, given a weaker job report than expected for July and higher oil prices.

Nonetheless, the Fed felt compelled to stick to its game plan of "measured" increases at a time when the underlying inflation appears to be low.

The rate hike follows a similar increase the Fed announced in late June, when it bumped the rate up by a quarter point to 1.25 percent, marking a first in four years for the monetary policymaker.

The Fed upped interest rates to keep inflation at bay and the economy from overheating.

"In recent months, output growth has moderated, and the pace of improvement in labor market conditions has slowed," the Fed said in a statement. "The economy nevertheless appears poised to resume a stronger pace of expansion going forward."

As a result, the Fed believes the upside and downside risks of raising rates are roughly equal, as it relates to sustainable growth and price stability for the next few quarters.

"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," the Fed said, echoing comments made in late June. "Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."


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