Fed plumps for seventh rate rise

Democrats angered by `bucket of ice water on the economy'

The Federal Reserve yesterday raised short-term US interest rates for the seventh time in a year, in a delicately balanced move to slow the economy's vigorous growth and choke off inflation, but without stopping the recovery in its tracks. After two days of deliberations , the central bank's policy-making Federal Open Market Committee decided to raise the two key rates by half a point, as analysts had overwhelmingly expected. The discount rate advances from 4.75 to 5.25 per cent - its highest level in since September 1991, while the federal funds rate, which banks charge each other for overnight loans, goes up to 6 per cent from 5.5 per cent.

The increases will play a significant role when Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, meet this morning to discuss UK interest rates. Failure to match the US move with a third interest rate rise in Britain could put sterling under pressure. UK base rates, if unchanged at 6.25 per cent, will be closer than usual to the key federal funds rate at 6 per cent.

British policy, just as in the US, is geared towards early action on interest rates to keep growth at a sustainable rate and prevent future increases in inflation. The Fed's statement yesterday said the half-point increase was ``necessary to keep inflation contained and thereby foster sustainable economic growth.''

The Fed said its decision came despite what it called tentative signs of slowing growth. Nonetheless, the ecomony was continuing to advance "at a substantial pace, while resource utilisation had risen further".

The US move, so widely anticipated, may be the last for a while. Although the economy produced its best performance for six years in 1994, with national output growing at 4 per cent, according to preliminary Commerce Department estimates, signs are multiplying that the six increases in short-term rates are starting to take their toll.

Retail sales over the important Christmas period showed a surprising decline, as have car and housing sales in the early part of last month. Indeed, the growing fear now is that the Fed may be overreacting to the risk of inflation. "To tighten further now is dangerous," said Larry Chimerine of the Economic Strategy Institute. "The last thing we need is another recession when we haven't fully recovered from the last one."

On Capitol Hill, 20 House Democrats had vainly urged Alan Greenspan, the Fed chairman, to hold his fire. "Leave rates alone," said David Bonior, the minority whip. "To raise them is like throwing a bucket of ice water on the economy."

Market rection was muted. Julian Jessop, international economist at HSBC Markets, said: ``As expected, the Fed cited the desire to nip inflation in the bud.''

There was some disappointment in financial markets that the policy makers had not opted for an even bigger, three-quarter-point, increase. The dollar drifted down immediately after the announcement, falling below the psychological tidemark of DM1.52. US Treasury bonds and share prices on Wall Street scarcely reacted.

The Fed gave no clue of the extent to which Mexico's financial crisis had been a factor in its discussions. Mr Greenspan has been a leading advocate of a rescue package for the peso. But higher US rates will increase the attractiveness of the dollar, andcould place further pressure on the Mexican currency.

Start your day with The Independent, sign up for daily news emails
News
i100
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
health
News
science
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
News
Chuck Norris pictured in 1996
people
ebooks
ebooksA celebration of British elections
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
News
A voter placing a ballot paper in the box at a polling station
i100
News
people
Arts and Entertainment
The Queen (Kristin Scott Thomas) in The Audience
theatreReview: Stephen Daldry's direction is crisp in perfectly-timed revival
Sport
football
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power