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Federal Reserve Raises Short-Term Interest Rates

Investors and economists are keeping a close eye on the Federal Reserve on Wednesday as the central bank is widely expected to raise short-term rates by a quarter of a percentage point later today. Meanwhile, the government said both consumer spending and inflation were up slightly in February.

(CN) - The Federal Reserve on Wednesday raised its short-term lending rate a quarter point and said two more increases are possible this year.

"In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range for the federal funds rate," the Federal Open Market Committee said in a statement released at 2 p.m. Wednesday.

"Near-term risks to the economic outlook appear roughly balanced," the statement said.

The rate increase was approved by 9-1 vote. The Fed's key short-term rate will not stand at a range of 0.75 percent to 1 percent.

This is the third increase in 15 months, though rates remain close to record lows. Because the rates are so low, investors are also waiting to hear what Fed Chair Janet Yellen will say about the pace of future increases during a news conference later today.

In its statement, the Federal Reserve said the FOMC "will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. ... The committee expects that economic condition will evolve in a manner that will warrant gradual increases in the federal funds rate."

In advance of the Fed's decision, U.S. stock indexes posted modest gains Wednesday morning and the government reported that consumer spending continued to rise in February, though at something less than a torrid pace.

In a separate report, the government reported that the price of many consumer goods also went up in February.

The Commerce Department said Wednesday that retail sales ticked up a seasonally adjusted 0.1 percent in February, after a much bigger gain of 0.6 percent the previous month.

Although tepid, economists said the uptick nevertheless suggests that consumers are feeling good about their job security and are seeing decent pay gains. They said some of the headwinds retailers saw last month could have been the result of delays in tax refund payments.

As a result, many economists are fairly bullish in their expectations for March, which will coincide with an increased flow in income tax refund payments.

And there are several other factors that could drive spending higher in the months ahead. Consumer confidence soared to its highest level in more than 15 years in February, according to the Conference Board, a business research group.

Hiring and average hourly pay growth have also picked up since the new year.

Sales rose in February at furniture stores and home and garden centers. But they fell sharply at electronics and appliance stores, the Commerce Department said.

Sales also fell at gasoline stations, though that mostly reflects lower prices. Clothing stores, sporting goods retailers and department stores also all reported lower sales.

A separate report showed inflation rose in February, with the cost of clothing and housing going up, while the price of vehicles and gasoline dipped slightly.

The Labor Department said Wednesday that consumer prices rose 0.1 percent in February, a sharp deceleration from the 0.6 percent jump in January.

The Fed has kept rates low in the aftermath of the 2008 financial crisis as inflation had been consistently running below the central bank's 2 percent annual target.

But consumer prices have risen 2.7 percent over the past year. Excluding volatile food and energy categories, prices have increased 2.2 percent, driving expectations of a rate hike on Wednesday.

Several key categories are running above that average. Housing costs have risen 3.5 percent over the past 12 months, while the price of medical treatment has climbed 3.4 percent.

Gasoline prices surged 7.8 percent in January — driving much of the increase in consumer prices that month. Gas prices slipped 3 percent in February, though they are up 30.7 percent over the past year.

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