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
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific