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Fed boosts key interest rate to a 5-year high

Statement spurs hope inflation fear may ease

WASHINGTON -- Federal Reserve policy makers again raised a key interest rate yesterday to the highest level in more than five years and signaled they may raise rates further to combat rising inflation.

Consumer price inflation ``has been elevated in recent months," the Federal Open Market Committee, the central bank's top policy making group, said in a statement after revealing its decision to lift its benchmark interest rate to 5.25 percent from 5 percent, the 17th consecutive quarter-percentage point increase since June 2004. Markets, which had anticipated the move, rallied on the news, with the Dow Jones industrial average soaring 217.24 points to 11,190.80, its biggest single-day jump in more than three years.

The committee noted that ``economic growth is moderating from its quite strong pace earlier this year, partly reflecting the gradual cooling of the housing market" and the effects of rising interest rates and energy prices. The economic slowdown ``should help to limit inflation pressures over time," the committee said, adding that ``some inflation risks remain."

The statement suggested the committee would raise the rate again at its next meeting in August if inflation pressures stay strong, or leave it unchanged if they are ebbing. The Fed's ``objective here is to tell the markets the Fed will keep its eye on inflation, but it's going to be flexible," said Ethan Harris, chief US economist at Lehman Bros. The Fed ``is not oblivious to the risks to growth."

``We expect them to hike in August, but it's not a done deal by any stretch," Harris said.

The benchmark federal funds rate, the rate charged on overnight loans between banks, influences many other borrowing costs throughout the economy. Major banks followed the Fed's action by raising their prime rate on business loans to 8.25 percent.

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