Fed Funds Rate Up Quarter Point

August 10, 2004 (PLANSPONSOR.com) - The Federal Open Market Committee (FOMC) raised its target for the federal funds rate by 25 basis points to 1.5%.

The Committee, in its customary announcement news release , said the decision to raise the target for the federal funds rate remains “accommodative” in providing ongoing support for economic activity.   For plan sponsors, the impact of the rise in interest rates will be felt in plans’ loan interest rates, which are tied to the Prime Rate.

“The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal,” the statement read. “With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. “

The Committee also speaks to a slowdown in the growth of the labor market, which the Committee attributes to “the substantial rise in energy prices.”   Despite this, the Fed remains optimistic that the economy “appears poised to resume a stronger pace of expansion going forward.”

In addition to the rise in the federal funds rate, the Board of Governors also approved a 25 basis point increase in the discount rate to 2.5%.

Changes in interest rates are of particular concern to plan sponsors because of their effect on the Prime Rate – a frequent benchmark for retirement plan loans.

A copy of the Fed’s statement is available at http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040810/default.htm .