FED RAISES RATE AGAIN; WALL STREET OPTIMISTIC QUARTER-POINT INCREASE WILL BE LAST THIS YEAR.

Byline: Martin Crutsinger Associated Press 

The Federal Reserve pushed borrowing costs higher for millions of Americans for the third time this year on Tuesday, boosting a key short-term interest rate by a quarter-point to 5.5 percent.

The central bank said its actions should ``markedly diminish the risk of inflation going forward,'' fanning hopes on Wall Street that there would be no more rate increases for a while. Investors sent stock prices soaring on the news.

But private economists warned that the language in the Fed's announcement clearly left open the possibility of further increases if the economy does not slow to a more sustainable pace.

``The Fed continues to be on inflation alert, driven by a strong economy and a tight labor market,'' said Allen Sinai, chief economist at Primark Global Economics in New York. ``The door is still open for more rate hikes, just not before early February.''

In a one-page announcement issued after its closed-door deliberations, the central bank said, ``Although cost pressures appear generally contained, risks to sustainable growth persist.''

For that reason, the central bank said it was boosting its federal funds rate, the interest that banks charge each other on overnight loans, to 5.5 percent.

That action triggered announcements from commercial banks that they were increasing their prime lending rate, the benchmark for millions of business and consumer loans, to 8.5 percent from 8.25 percent.

The Fed also increased its largely symbolic discount rate, the interest it charges to make direct loans to banks, by a quarter point to 5 percent.

It marked the third time this year the central bank has increased the federal funds rate as it has tried to engineer a soft landing, slowing the economy enough to keep inflation pressures in check while not endangering the 8-1/2-year economic expansion, already the longest in peacetime history.

The Fed raised the funds rate to 5 percent on June 30, the first rate increase in two years, and boosted it by another quarter-point on Aug. 24.

In its statement, the central bank said it was moving its policy directive, which is intended to signal future interest rate moves, back to neutral. The directive had been switched to a bias toward raising rates at the last meeting in October.

Wall Street staged a strong rally on the optimistic forecast of lower inflation pressures and the switch to a neutral bias. The Dow Jones industrial average finished the day up 171.58 points at 10,923.33, its highest close since Sept. 13.

Private economists agreed with Wall Street that the Fed was sending a strong signal that it is finished raising interest rates for this year, in part because of the view that the central bank did not want to boost rates at its Dec. 21 meeting because of a desire not to be changing policy so close to the Year 2000 computer date change.

But analysts also said the central bank apparently was still worried that the economy was growing too rapidly. The Fed said the pool of available workers has dwindled as ``the expansion of activity continues in excess of the economy's growth potential.''

Federal Reserve Chairman Alan Greenspan has expressed worries for more than a year that continued tight labor markets will eventually trigger rising wage demands, especially if the recent spurt in productivity falters.

So far, businesses have been able to cover higher labor costs through increases in productivity, more output per hour of work.

Merrill Lynch chief economist Bruce Steinberg said the Fed's next move would likely be triggered by watching the unemployment rate, which fell in October to a 30-year-low of 4.1 percent.

``The Fed's greatest worry is that the United States is simply running out of warm bodies,'' Steinberg said. ``For policy to remain on hold going forward, unemployment can't fall much further.''

Economists had been split over whether there would be a rate increase at Tuesday's meeting. Those arguing that the Fed would keep rates unchanged pointed to the fact that there are no signs yet of higher inflation. Consumer prices through September are rising at a modest annual rate of 2.8 percent for the year, even with a big jump in energy costs.

Noting the low inflation figures, economists for major business groups argued that Tuesday's rate increase was unjustified.

``Inflation is in hibernation, and this hike in rates is simply ill-timed,'' said Gordon Richards, chief economist for the National Association of Manufacturers.

Martin Regalia, chief economist for the U.S. Chamber of Commerce, said the rate increases would hit small businesses the hardest because more of their borrowing is tied to changes in the prime rate.

Separately, the Federal Reserve in a report Tuesday said industrial production at the nation's factories, utilities and mines surged in October, rebounding from the hurricane that had depressed production by 0.1 percent the month before.

Industrial production rose a bigger-than-expected 0.7 percent, the largest jump since a 0.7 percent increase in March, as output bounced back at electric utilities and in a number of manufacturing industries. Operating capacity was 80.7 percent, the highest this year.

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