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Fed nudges interest rates higher

The Federal Reserve pushed interest rates slightly higher Tuesday for the first time in two years, hoping to stifle any threat of rising inflation. Banks immediately began raising the rates paid by millions of Americans.

Analysts suggested the Fed's quarter-point increase was not the end of the story, with two or three more boosts likely by the end of the year to slow the surprisingly strong economy.

The central bank characterized its increase as "a prudent step" that would guard against higher inflation and the risk of recession. But critics charged that there is no inflation to pre-empt and the credit tightening raises the risk of recession.

"In one fell swoop, the Fed has taken money out of the pockets of every family, small business and farm in America," said Sen. Tom Harkin, D-Iowa, a frequent Fed critic.

The central bank said it was pushing its target for the federal funds rate, the interest that banks charge each other, up to 5.5 percent.

Banc One of Ohio and Citibank, the nation's second-largest bank, were the first major banks to signal increases in their prime lending rate, pushing it up a quarter-point to 8.5 percent.

The prime is used by many banks to peg rates for credit cards, auto loans, home equity loans and adjustable rate mortgages. In recent years it has moved in step with the fed funds rate.

"A quarter-point doesn't sound like much," said James J. Daly, associate editor at Credit Card News. For some people, "it could be the proverbial straw that breaks the camel's back."

A quarter percentage point increase would boost monthly payments by $17 on a $100,000, 8 percent, 30-year mortgage. Payments on a five-year, 11{ percent new car loan of $17,500 would go up $2.20. A quarter point rise would add $1-billion per year in interest payments to all credit card debt, or about $10 a year per household.

"A quarter-point today is barely going to make the radar screens of most consumers," Kenneth Mayland, KeyCorp's chief economist, said.

Financial markets, which reacted violently in 1994, the last time the central bank launched a round of credit tightening, were calmer this time. The Dow Jones Industrial Average was up 50 points a few minutes after the 2:14 p.m. announcement as investors expressed relief that the central bank had carried through on the numerous signals sent recently by Federal Reserve Chairman Alan Greenspan. The Dow finished the day down 29.08 at 6,876.17.

In its statement, the central bank said Tuesday's increase had been taken "in light of persisting strength in demand, which is progressively increasing the risk of inflationary imbalances."

Many economists believe growth could be as high as 4 percent this quarter, almost double the rate the central bank has been aiming for at this stage of the expansion with factories at high operating levels and unemployment at a seven-year low.

David Jones, economist at Aubrey G. Lanston & Co., said he was looking for two more quarter-point moves occurring by August, with the Fed then re-evaluating.

The Clinton administration, which has made cordial relations with the Federal Reserve a hallmark of its economic policy, was restrained in its reaction.

"We share the goal of maintaining solid economic growth with low inflation," Treasury Secretary Robert Rubin and Council of Economic Advisers Chairman Janet Yellen said in a joint statement.

"It is a regrettable and serious mistake," said National Association of Manufacturers vice president Paul Huard. "It will impede economic growth and make life tougher on consumers and job-creating businesses."