Most economists are now betting that the Federal Reserve has moved far enough to avoid the threat of rising prices next year but not so far that its policies will lead to a recession. Economists generally expect the economy to undergo a sharp slowdown next year because of the central bank actions, reducing overall economic growth to below 2.5% from this year's pace of about 3.9%.
But many Federal Reserve officials and conservative economists believe that economic growth cannot be sustained above 2.5% without risking higher inflation and so are committed to that growth rate as a key target for monetary policy.
The rate decision came on a day when the government reported that retail sales jumped by an unexpectedly strong 1.1% in October and U.S. industry operated at 84.9% of capacity last month, the highest level in nearly 15 years.
Tuesday's strong action has convinced many economists that the central bank has finally caught up with the pace of economic growth and will not raise rates again in its next major policy meeting in December. Many observers think that it may be able to put off another rate hike until February or even later.
"It's a pretty large move and they clearly wanted to make a statement that they are here, they are in charge and that they will take care of inflation," observed Donald Ratajczak, an economist at Georgia State University.
But that enthusiasm for the Federal Reserve strategy was not shared by the central bank's widening circle of critics, ranging from leading business executives to unemployed workers and lawmakers--who argued that the central bank's focus on price stability is choking off the nation's recovery as it is beginning to generate more jobs and higher wages.
Hundreds of unemployed workers and other protesters demonstrated outside the central bank's Washington headquarters, chanting for Greenspan to change his mind and hold down rates.
"We came here to tell them to stop raising rates. It's making the job outlook very gloomy," said Lester Thomas, a 54-year-old unemployed sheet metal worker from Philadelphia, as he protested outside the Fed headquarters.
Tracking the Increases
The Fed's policy-making panel raised short-term interest rates for the sixth time this year. In its statement, the Fed sought to signal its resolve to fight any reappearance of inflation.
1994 Federal Funds Increases: The federal funds rate is what banks charge each other on overnight loans:
Nov. 15: 5.50%
1994 Discount Rate Increases: The discount rate is the interest the Fed charges to make direct loans to banks.
Nov. 15: 4.75%
30-Year Fixed Home Mortgage Rates