US interest rates raised

The Federal Reserve has raised US interest rates by a quarter-percentage point for the fifth time this year and said it will keep gradually lifting them from rock-bottom levels as the economy grows.

Stocks moved higher in response to the decision
Stocks moved higher in response to the decision

The unanimous and widely expected decision by the central bank’s policy-setting Federal Open Market Committee moves the benchmark federal funds rate – which affects credit costs throughout the economy – to 2.25% from 2%.

The Fed began to lift rates in June from a 1958 low of 1% and is poised to move them higher still as long as the economy continues its steady march forward.

A few analysts had wondered whether the Fed would warn about a heightened risk of upward price pressures, but the central bank said risks to the economy remained balanced between inflation and renewed weakness.

Policymakers also said they thought inflation and longer-term inflation expectations were in check.

Dollar falls

The dollar dipped in the wake of the decision while stocks edged higher and Treasury bonds pared losses.

Decreasing oil prices may keep inflation in check

Decreasing oil prices may keep
inflation in check

“Output appears to be growing at a moderate pace despite the earlier rise in energy prices, and labor market conditions continue to improve gradually,” the Fed said in the statement announcing its action.

Along with raising its target for the rate banks charge each other for overnight loans, the Fed also hiked the largely symbolic discount rate, the price charged for loans it makes directly to banks, by a quarter-point to 3.25%.

The US economy grew at a respectable 3.7% annual rate in the third quarter and job gains have averaged 178,000 over the past three months – not spectacular but fast enough, analysts say, to whittle away at the unemployment rate.


Economists say the Fed may grow warier on inflation as the jobless rate, which dipped last month to 5.4%, falls.

“It’s not a robust expansion, but on the other hand it is an expansion and we are growing fast enough to see improvements in the job market,” said David Berson, chief economist at mortgage finance giant Fannie Mae.

Analysts say the job market is improving

Analysts say the job market
is improving

So far, the Fed’s preferred measure of core inflation – a price index for personal spending that excludes volatile food and energy costs – has held in a zone that should cause officials little concern.

However, production costs are rising and another popular price gauge, the Consumer Price Index, has been climbing even when food and energy costs are stripped out.

In contrast, oil prices have receded from record highs hit in late October, which could help keep underlying inflation pressures in check and should also ease worries that high energy costs could knock the expansion off the rails.

Economy growing

As policymakers began meeting, the Fed released a report showing US industrial output rose 0.3% last month, a
further sign of the economy’s steady advance.

“This is very consistent with an economy growing at 3.5 to 4.0%,” said David Littman, chief economist at Comerica Bank in Detroit. “It is congruent with job growth and consumer optimism.”

Since it began to hike credit costs in June, the Fed has moved in quarter-point steps at each of its five meetings and analysts say further increases are certainly on the cards.

Futures markets have been betting heavily that policymakers will bump the benchmark federal funds rate up another notch when they next meet in early February and had begun leaning toward the view that another rise will come at the subsequent meeting in March.

The median forecast in a survey from the Bond Market Association released on Monday was for a fed funds rate of 3% by mid-year and 3.5% by the end of 2005.

Source: Reuters

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