The Federal Open Market Committee unanimously voted to increase the federal funds rate by 25 basis points to 4.75% yesterday. This is the key interest rate that banks charge each other on overnight loans; it also affects other rates charged to consumers and businesses.
This was the first time Federal Reserve Chairman Ben Bernanke has raised interest rates, and it came as little surprise. The FOMC also said “some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”
“The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors.”
Price increases in both energy and other commodities have had only a modest effect on core inflation, according to the FOMC, which added that, “ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained.”
The Federal Reserve’s Board of Governors also voted to approve an increase of 25 basis points in the discount rate, which brings it up to 5.75%.