Fed hikes rates 1/4 point;
Dow soars 227
The Nasdaq recovers from aAssociated Press
143-point hole to finish
up 102 points
WASHINGTON -- The Federal Reserve raised a key interest rate today by a quarter-point -- the fifth increase since June -- in an effort to slow the speeding economy and keep inflation from escalating.
The announcement came after a closed-door meeting of the Federal Reserve's Federal Open Market Committee, the officials who set interest rate policies.
Stock prices bounded higher amid growing confidence that the Fed is just about done raising interest rates in its battle with inflation.
The Fed said it was increasing its target for the federal funds rate -- the interest that banks charge each other on overnight loans -- to 6 percent, its highest level in almost five years, from 5.75 percent. It also raised its mostly symbolic discount rate, the interest that the Fed charges to make direct loans to banks, by a quarter-point to 5.50 percent from 5.25 percent.
The increase raises the cost of borrowing for American consumers and businesses. Immediately following the announcement, Charlotte, N.C.-based Bank of America Corp., the biggest U.S. bank, raised its prime lending rates by 25 basis point to 9 percent. Most other U.S. banks are expected to follow immediately.
(In Hawaii, both First Hawaiian Bank and Bank of Hawaii announced late this morning that they likewise are raising their prime rates to 9 percent, effective tomorrow.)
The prime rate is a key benchmark for millions of loans, from home equity and credit card balances to short-term loans for small businesses.
On Wall Street, the Dow Jones industrial average rose 227.10 points, or 2.13%, to close at 10,907.34.
The technology stocks that dominate the Nasdaq composite index benefited most from the Fed's early-afternoon announcement. The Nasdaq rebounded from an early loss of as much as 143 points to finish up 101.68, or 2.21 percent, at 4,711.68.
The Standard & Poor's 500 rose 37.24, or 2.56 percent, to 1,493.87.
Advancing issues outnumbered decliners by an 11-to-7 margin on the New York Stock Exchange, with 1,787 up, 1,151 down and 510 unchanged. NYSE volume totaled 1.055 billion shares vs. 917.61 million yesterday. The American Stock Exchange index fell 2.44 points to 1,003.83; the Russell 2000 index of smaller companies rose 3.59 to 552.79; the NYSE composite gained 11.65 to 642.79.
The market gathered momentum after the Fed confirmed Wall Street's expectation for the quarter-percentage point increase.
Along with its announcement, the Fed said "risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."
This statement does not guarantee there will be future rate increases, but it does put financial markets on notice that the Fed remains worried about inflation.
Still, market analysts said that with scattered evidence that the economy is slowing, investors are becoming increasingly confident that the Fed's long cycle of rate increases is almost over.
"The central bank's credibility is very high right now," said Chris Conkey, chief investment officer at Evergreen Investment Management in Boston. "The news of an increase was already factored in, and there's a strong sense that the Fed is on top of things."
David Jones, an economist with Aubrey G. Lanston & Co., said: "What the Fed is trying to do here -- first and most importantly -- is cool off red-hot domestic demand growth. That is consumers."
The Fed had already raised rates four times in quarter-point steps since June to slow the economy and keep inflation under control. The increases have done little to either slow the economy or its main engine -- consumer spending, which accounts for two-thirds of all economic activity.