Fed delivers 10th interest rate increase, more expected

That means borrowers will pay more for home mortgages, auto loans and other types of credit.

Immediately after the Fed announced Tuesday it was raising a key short-term rate by one-quarter percentage point to 3.5 percent, commercial banks announced they were raising their prime lending rate by one-quarter point.

That pushed the prime — the benchmark for millions of consumer and business loans — up to 6.5 percent, the highest level in nearly four years. If economists’ predictions are correct about further Fed rate hikes, the prime will be at 7.25 percent by the end of this year.

Many analysts predict, based on the Fed’s comments Tuesday, that the central bank will boost rates at each of this year’s last three meetings, on Sept. 20, Nov. 1 and Dec. 13.

“They are pretty much telling us that they have raised rates and they are going to raise them again,” said David Wyss, chief economist at Standard & Poor’s in New York.

The Fed acted against a backdrop of a strong economic growth, as measured by the gross domestic product, that many forecasters expect to top 4 percent this quarter, even in the face of record high oil prices.

Federal Reserve Chairman Alan Greenspan and his colleagues, in a statement explaining the rate increase, said economic growth has strengthened despite the pressures posed by rising energy prices.

The Fed stated that inflation outside of energy and food has been “relatively low,” but it repeated a worry that “pressures on inflation remain elevated.”

The Fed continued to state that its interest rate policy is “accommodative” and future rate hikes can continue at “a pace that is likely to be measured.”

Translation: The Fed has not yet pushed interest rates up far enough to reach the neutral level it is seeking, where interest rates are not stimulating the economy or slowing it down.

Economists have been left to guess where that neutral point sits. Many have been raising their estimates from as low as 3.25 percent to 4.25 percent or even 4.5 percent.

Sung Won Sohn, chief economist at Hanmi Bank in Los Angeles, said he believes the Fed will raise rates three more times this year and then make a final one-quarter point move in early 2006 to push the funds rate to 4.5 percent.

Analysts believe the steady increase will not trigger a sharp falloff in sectors of the economy affected by interest rates, such as autos and housing, because the movements are so gradual.

David Jones, chief economist at DMJ Advisors consulting firm in Denver, said he believed 30-year mortgage rates will remain at a level low enough to feed strong housing demand and a fifth straight home sales record this year. Jones said he expects those rates, which have been rising for five weeks to the current 5.8 percent rate, will reach 6.25 percent by the end of this year.

Analysts believe mortgage rates will rise to roughly 6.5 percent by the middle of next year and 6.75 percent by the end of 2006, still low by historical standards.

“Home sales will be down, and prices will moderate a bit,” Wyss said. “But 6.5 percent to 7 percent is still a low mortgage rate.”

President Bush was careful not to comment on the Fed’s decision Tuesday while his economic team visited his ranch in Crawford, Texas. Bush told reporters he was more concerned that soaring energy and health care prices were pinching Americans’ pocketbooks.

Ben Bernanke, the president’s chief economist and a former member of the Fed, said he saw no danger of inflation getting out of hand.

“The core inflation rate over the last year is about 2 percent, and we see inflation remaining well-contained going forward,” he told reporters.

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