U.S. raises interest rates, hints at further hikes

(June 30, 2004) The U.S. Federal Reserve today raised its key overnight lending rate by 25 basis points to 1.25%, the first increase in four years. The decision by the Fed was unanimous and widely anticipated by economists.

In a statement, the Fed pointed to “robust underlying growth in productivity,” which the committee said has provided ongoing support to economic activity.

In addition, inflation is expected to be relatively low, the Fed noted, which would allow for future rate increases at a “measured” pace.

The Fed hasn’t raised interest rates since May 2000, when the overnight lending rate climbed to 6.5% from 6%. But since 2001, rates have been reduced 13 times, bottoming out at 1% last year.

The Bank of Canada’s overnight lending rate currently stands at 2%. BMO Nesbitt Burns economist Douglas Porter says that while he doesn’t expect our central bank to immediately mimic the Fed’s move, it’s “exceptionally rare” for Canadian rates not to follow U.S. rates higher.

Porter predicts the Bank of Canada will start boosting rates after Labour Day.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com