USA TODAY:
Fed Raises Interest Rates

The Federal Reserve raised a key interest rate by a tiny one-quarter point today, the first increase in two years. Fed policy-makers signaled the change may be enough to slow the economy to a more moderate pace.

The signal was well-received on Wall Street. A half-hour after the announcement, a losing day had turned into a 100-plus-point gain in the Dow Jones industrial average.

The Fed announced it was increasing its target for the federal funds rate, the interest that banks charge each other on overnight loans, to 5 percent, up from 4.75 percent.

The action, which had been widely expected, was announced at the end of the second day of deliberations by the Federal Open Market Committee, the Fed policy-makers who set interest rate policies.

The Fed said given current tight labor market conditions, it ``must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth.''

While the Fed raised the funds rate by a quarter point, central bank policy-makers said they were switching their policy directive, which serves as an indication of future moves, back to neutral.

Before the current rate increase, the Fed had switched in the direction of leaning toward an increase in rates, a signal the markets took that a boost was likely soon. By switching back to neutral, the central bank signaled it may not need to follow up today's rate action with additional rate increases.

``Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action,'' the Fed's statement said.

The Fed said while the lowest unemployment rates in three decades mean that labor markets are exceptionally tight, a recent improvement in the growth of workers' productivity has kept inflationary pressures well contained.

The Fed's decision quarter-point rate hike was expected to be followed quickly by announcements from commercial banks that they were boosting their prime lending rate by a similar quarter point, from the current 7.75 percent to 8 percent. The prime rate is a key benchmark for millions of loans, from home-equity loans and credit card balances to short-term loans for small businesses.

The Fed's decision marked the first time the central bank had raised interest rates since a quarter-point increase in the funds rate March 25, 1997, a move also taken as a pre-emptive strike against inflation.

The March 1997 rate increase was also a solitary boost. The Fed two years ago did not feel the need to make any more rate increases because in July of that year the Asian currency crisis began, pushing a number of countries into steep recessions.

In fact, last fall, the Fed cut the funds rate three times over a period of seven weeks as concern mounted that overseas turmoil could seriously harm the U.S. economy.

But today, the Fed said in its brief announcement: ``Since then much of the financial strain has eased, foreign economies have firmed and economic activity in the United States has moved forward at a brisk pace.''

Economists believe the Fed will be able to accomplish a ``soft landing'' in which growth slows enough to keep inflation in check without the economy toppling into a recession. They took encouragement from a report today showing a solid 0.3 percent rise in the Index of Leading Economic Indicators, designed to forecast the economy's future course.

Analysts said the May indicators advance showed the economy has enough momentum to withstand the rate increase that Greenspan had signaled was imminent at a congressional appearance two weeks ago.

``When we can be pre-emptive, we should be, because modest pre-emptive actions can obviate the need of more drastic actions at a later date,'' Greenspan said at the time.

The Fed under Greenspan has preferred to be forward-looking, moving to raise interest rates before higher inflation has a chance to take off. In the past, some analysts say, Fed policy-makers waited too long to start raising rates, meaning they had to push interest rates so high that the economy was often knocked into a recession.

But Fed critics have charged the central bank is being too hasty to consider raising rates with inflation showing no signs of getting out of control and with the global economy still in a fragile state.

``The risks of raising rates are far greater than any benefits that might be achieved,'' economist Jerry Jasinowski, president of the National Association of Manufacturers, said Tuesday.

``Working families will pay the price of a mistaken tightening,'' AFL-CIO President John Sweeney complained at a Capitol Hill rally that liberal groups staged last week to argue against a Fed rate increase.

Unemployment has fallen to the lowest levels in three decades, currently at 4.2 percent. While inflationary wage pressures have not yet become evident, Fed policy-makers are concerned that many of the factors that contributed to low inflation last year -- falling oil prices and weak global demand -- are beginning to reverse, setting the stage for a potential inflationary surge, especially with U.S. consumer demand remaining so strong.

http://www.washingtonpost.com/wp-srv/business/longterm/fed/fed.htm

AP:
U.S. Cos. Lost $24B Over Bribes

WASHINGTON (AP) — American companies lost $24 billion over five years in international contracts in which bribes were involved, the State Department says in a classified report being sent to Congress on Thursday.

A major problem, officials said, is that many countries still allow businesses to claim bribery as a tax deduction — a practice the Clinton administration says it is pressuring other governments to stop.

Stuart Eizenstat, undersecretary of state for economic affairs, disclosed the estimate in a briefing Wednesday on U.S. plans to get countries to comply with a new anti-bribery treaty signed by 33 nations on Feb. 15. So far, 15 governments have ratified the convention.

Eizenstat said the five-year State Department report, an annex to an annual report to Congress required under treaty legislation, details incidents of corruption around the globe. It mentions bribery allegations in 294 contracts worth $145 billion between 1994 and 1998, he said.

``We believe that this led to the loss of billions of dollars of sales by U.S. companies,'' Eizenstat said. He said officials were able to track bribery allegations in 77 contracts worth $24 billion where U.S. corporations lost the bids.

``We can't say that each of those contracts, the reason why the contract was lost was because of the bribe,'' he said. ``But that of those contracts where there was an allegation of a bribe, American companies lost that many contracts.''

The Commerce Department, meanwhile, in a separate report covering just last year and also going to Congress on Thursday, said there were 55 contracts worth $37 billion in which there were allegations of bribery.

U.S. officials are pressuring other of the 33 signatories of the anti-corruption treaty to disallow bribes as a tax deduction. Eizenstat called it a ``pernicious practice that amounts to an export subsidy.''

``Allowing these deductions for whatever reason in our judgment is simply inexcusable,'' said Undersecretary of Commerce David Aaron. He said Sweden would end the practice Thursday but it still remains in effect in Australia, Luxembourg, New Zealand and Switzerland.

Aaron and Eizenstat, briefing reporters at the State Department on progress against corruption under the treaty, said the United States will watch how major trading nations enforce the accord and tell them when their efforts fall short or need more work.

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AP:
U.N. Population Conference Opens

UNITED NATIONS (AP) — Still at odds over sex education and abortion, delegates from 180 countries opened a three-day special U.N. session Wednesday to find ways to cope with the world's population as it nears 6 billion.

``To no small extent, your efforts will help determine the way future generations live on this Earth: their health, the range of their choices, the stability of their societies,'' U.N. Secretary-General Kofi Annan said in a toast at a luncheon for conference participants.

Five years after 179 countries adopted an ambitious 20-year program to curb the world's population at a U.N. conference in Cairo, delegates are meeting to decide on new proposals to implement it.

``Since Cairo, the world does understand ... that we have to stabilize the population of this planet,'' Annan said in his opening speech to the General Assembly.

The main premise of the Cairo program — that population and development are linked, and that educated women with access to reproductive health care have fewer children — ``seems blindingly obvious now,'' he said. ``But until Cairo the world did not fully understand it.''

U.S. Assistant Secretary of State Julia Taft said the five-year review of the Cairo conference had shown that linking women and development is taking root in a positive way.

Countries are reporting reductions in maternal and infant mortality because of improved health care, she said, and the expansion of education for girls has resulted in lower fertility rates and girls becoming more economically valuable to their countries.

Some of the same divisive issues that dominated the 1994 Cairo conference, however, have stalled agreement on new priorities for future action.

One contentious issue is at what age young people should receive sex education in school and whether children have a right to confidentiality on sex-related problems.

The second major issue is whether countries should be asked to review laws that punish women for having illegal abortions.

As in Cairo, the Vatican and its supporters, Argentina, Nicaragua and Guatemala, have been the most vocal opponents. In the current debate, they have been joined by Libya and Sudan, which did not attend the 1994 conference.

Nonetheless, Dr. Nafis Sadik, executive director of the U.N. Population Fund, said she was ``very happy'' with the progress so far on the final document. And even if the review of abortion laws isn't adopted, she said the debate is important.

``Before people never wanted to discuss it. It was shoved under the table,'' she said. ``Now it's being discussed, particularly how we should address and deal with it, recognizing that these are unwanted pregnancies — and the first intention of women and girls is not an abortion, but not to have become pregnant.''

While the drafting team continued to work on the final document, government representatives from nearly 50 countries spoke to the General Assembly.

Peruvian President Alberto Fujimori, the only head of state attending, said that after the Cairo summit, his country had almost tripled to 1 million the number of couples using some means of birth control.

But with the gap between rich and poor countries increasing, he said ``we are seeing a renewal of the vicious circle — unwanted children and poverty'' in the developing world.

``We must give couples information so they can freely decide on the size of their families,'' he said.

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