Fed piles on rate pressure

Fed piles on rate pressure

The US Federal Reserve yesterday moved to quash the threat of inflation derailing America's record economic expansion, by raising rates for the fourth time in seven months.

In a widely expected move, the US central bank increased the federal funds rate by a quarter-point to 5.75%. US base rates are now the same level as the UK's. It also raised the less widely used discount rate by a quarter-point to 5.5%.

Wall Street took yesterday's move calmly but most economists believe further interest rate rises are on the cards. David Jones, chief economist at Aubrey G Lanston, said: "This is the beginning of a series of cautious rate hikes aimed at slowing the economy's growth rate to a more sustainable pace."

After rising 60 points ahead of the Fed announcement, the Dow Jones share index lost all that and was six points down at 11,034 in midday trading.

The Fed's open market committee hinted that yesterday's move would not be the last. It said: "The committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth.

"Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion."

Yesterday's move came as the US economy broke all records for uninterrupted growth, entering its 107th month of expansion. In the last quarter of 1999 the economy grew at an annual rate of.....continued below

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5.8%. Unemployment has fallen to a 30-year low while households have gone on a debt-fuelled spending spree.

Robert Rubin, the former US treasury secretary, said last night that policymakers should be worried about the build-up of imbalances in the US economy.

Some analysts believe the economy has entered a "new paradigm" where old economic rules no longer apply.

But Mr Rubin said this view was "contrary to all of human history with respect to markets and economies, and that should be a sobering caution." In a speech to the London School of Economics he warned that complacency was the biggest threat to the global economy.

A record trade deficit, tight labour markets, a low personal savings rate and stock valuations which were high by conventional measures were factors he cited as potential problems for the US economy.

In yesterday's announcement, the Fed for the first time employed a new disclosure policy which it hopes will remove some of the confusion that arose in markets over the past year over its announcements about potential future actions.

The Fed said that future "risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future".

This statement does not guarantee that there will be future rate increases but puts financial markets on notice that the Fed continues to be worried about inflation.

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