WASHINGTON – The Federal Reserve Tuesday boosted the federal funds rate by a quarter-point despite disappointing jobs data a week ago. The central bank did not want to send a signal to Wall Street that recent softening in the economy was a sign of worst things to come.
The action comes a day after Comerica released its monthly Advance Economic Barometer for the state of Michigan, which declined 0.2 points from June. Comerica Chief Economist David Littmann said the new reading suggests Michigans Gross State Product will rise over the balance of 2004, but at a decelerating pace.
Meanwhile in Washington, the Federal Open Market Committee, the panel that sets interest rates, boosted the target for the federal funds rate to 1.50 percent.
The funds rate, the interest that banks charge each, had been at a 46-year low of 1 percent just six weeks ago when the Fed raised it to 1.25 percent, the first increase in four years.
Analysts said that if the Fed had decided to forgo its widely expected rate hike it would have raised concerns in financial markets that the central bank was worried that the current economic slowdown, which Fed Chairman Alan Greenspan has termed a “soft patch,” was threatening to become more severe.
In explaining its action, the Fed said that economic growth had moderated somewhat in recent months and “the pace of improvement in labor market conditions has slowed.” It blamed this economic slowdown on the jump in energy prices this year but predicted that the economic weakness should be temporary.
The Fed statement said that the economy “appears poised to resume a stronger pace of expansion going forward.”
