Greenspan's successor uses first meeting to raise US interest rates

Greenspan's successor uses first meeting to raise US interest rates

The US Federal Reserve, under its new chief Ben Bernanke, last night raised interest rates by a quarter point to 4.75%, their highest level in nearly five years, as it sought to head off inflationary pressures and cool the economy.

The move is the 15th the US central bank has made since former chairman Alan Greenspan began raising rates from a 46-year low of 1% in mid-2004. It takes the cost of borrowing in America above British levels for only the second time in the past two decades, which financial analysts say could push the pound down against the dollar.

Mr Bernanke, chairing his first meeting of the Federal Open Markets Committee since succeeding Mr Greenspan last month, had been widely expected to continue tightening monetary policy both to ensure inflation did not take off and to establish his inflation-fighting credentials on world financial markets, which hang on every utterance of the Fed chief.

The central bank's move seemed amply justified by data released earlier yesterday showing confidence among American consumers had jumped to its highest level in nearly four years this month. The rise was much bigger than Wall Street analysts had predicted and left them thinking the Fed would not stop tightening policy.

"This ... will boost hopes that activity in the first half of 2006 will remain robust. It will also increase talk of the Fed raising rates again in May, to 5%," said James Knightley, economist at ING Financial Markets.

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US economy now seems to have shrugged off the blow it took from the hurricanes of last autumn and is growing robustly and starting to push up inflation. The challenge for Mr Bernanke, however, is to apply the brakes without causing the world's biggest economy to stall.

Nariman Behravesh, chief economist at consultancy Global Insight, expected the Fed to raise rates another notch to 5% at its next meeting on May 10 and said a further rise was possible over the summer, taking rates to 5.25%, particularly as Mr Bernanke said recently there was little sign that the economy was slowing down.

"The only thing that might give the Fed pause would be a sharp correction in the housing market - a possible, but unlikely event," he said.

The US housing market has been one of the Fed's biggest concerns. Like Britain, the US has experienced a property boom driven by low interest rates and rising incomes. Average price rises are still in double digits and house sales excluding new homes jumped last month after having fallen for the previous five months. The market has cooled a little compared with last year but is still far from being weak.

As happened in Britain, Americans have borrowed against the inflated value of their homes, allowing them to carry on spending faster than their incomes have grown, leading to fears that a sharp slowdown in the housing market could cause a sharp drop in consumer spending, which accounts for two-thirds of the US economy.

Analysts are also keeping a nervous eye on US petrol prices which are rising again in response to stronger oil prices.

Sterling has been buoyed in recent years on the foreign exchanges both by Britain's relatively strong economic performance and the fact that interest rates in the UK were higher than most other countries, making sterling assets attractive. In the past when UK rates have been lower than US ones, the pound has tended to fall.