(by Julia Jenson)

In a meeting of the Federal Open Market Committee Wednesday, the policy makers fulfilled the expectations of the analysts announcing a quarter-point rise in its target for the Federal funds Rate, bringing it 2% from 1.75%, the highest level since November 2001. The vote was unanimous. This is the fourth rise since June 2004, which represents the longest run of consecutive gains in the key short-term interest rate. In June the Fed funds rate was at a 46-year low of 1%, the level that was necessitated by the economic recession of 2001.

Most analysts expect the Fed to bump up the rate again in its next meeting scheduled on December 14, though it hasn’t raised interest rates in December since 1988. The first meeting in 2004 is Feb. 1-2.

Fed funds rate is one of the two key rates that Fed manipulates to influence the economy. The second is the discount rate, at which member banks may borrow short term funds directly from a Federal Reserve Bank. The Fed sets this rate directly, and the Federal Funds rate is indirectly affected by the Fed and effectively controled by the way the Fed buys and sells Treasuries to banks Fed funds rate is the one that banks charge each other for overnight loans of reserves deposited with the Federal Reserve.

The discount rate was raised to 3% following increase requests submitted by 11 of the 12 regional Fed banks.

The 12-member Federal Open Market Committee meets 8 times a year to determine credit policies and issue Fed bias, a statement that expresses Fed’ perspective on the economy and helps analysts figure out whether the next rate hike is likely in the next meeting.

Wednesday’s attempt to tighten credit was brought about by solid GDP growth (3.7% annual rate in the third quarter), sufficient consumer spending and an optimistic October payroll report indicating the addition of 337,000 jobs in the past month. This may mean that the Fed will continue to raise rates at a “measured pace” in an attempt to achieve a Fed funds rate of around 4% that would be relatively neutral, that is, neither slow nor stimulate economic activity.

The Fed funds rate, not directly affecting consumers, tends to factor into the level of other rates in the economy. Thus, Wednesday the three top US banks Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. raised their prime lending rates to 5%.

Mortgage rates, although remaining low and stimulating the vital housing market, still showed an increase for the first time in a month, with the average 30-year fixed mortgage reaching 5.7%, compared to the prior week’s 5.64%, according to Freddie Mac.

The statement issued by the FOMC suggests that it expects underlying inflation to be “relatively low”. Fed believes the economy "appears to be growing at a moderate pace despite the rise in energy prices" and longer-term inflation expectations "remain well contained." The personal consumption expenditures price index, minus food and energy, rose 1.5 % in September. Most experts agree that the primary concern is not yet inflation. Considering this steady progress, the Fed reiterated its commitment to “accommodative” monetary policy.