Fed lifts US rates a quarter-point to tackle inflation

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The Independent Online

The Federal Reserve yesterday raised lending rates in the United States by one quarter point, in spite of recent indicators showing that strong economic growth at the start of the year had appeared to soften with disappointing job creation numbers released last week.

The decision to further tighten monetary policy ­ increasing the federal funds rate from 1.25 per cent to 1.5 per cent ­ was accompanied by a commentary arguing that any deceleration in growth may be only a transitory blip and that the outlook remains robust.

Wall Street took heart from the Fed's comments that the economy was poised to pick up. The blue chip Dow Jones rose 130 points to end at 9,944.7.

There was disappointment on Friday when the US government said that the economy had put on only 32,000 jobs in July. It was the weakest showing since December and far below analysts' forecasts of about 200,0000. Mr Greenspan, the Fed's head, had said before yesterday that he saw a "soft patch" in the growth trend.

In its statement, the Fed acknowledged the apparent hiccup in growth, saying that economic growth had moderated and that "the pace of improvement in labour market conditions has slowed". But it also suggested that the American economy "appears poised to resume a stronger pace of expansion going forward".

The rate rise reflects continuing anxiety about a possible reawakening of inflation in the US economy. But many observers think that after yesterday's small increase, the Fed may now step back for a few months before tightening conditions further, possibly until after the presidential election in early November.

The Fedbegan the tightening process on 30 June, when it nudged up its federal funds rate by one quarter point from 1 per cent, which was a 40-year low for interest rates, to 1.25 per cent. It was the first increase from the bank in four years.

But conditions have changed considerably since the end of June, when the US economy seemed to be in a gallop. Concerns about oil prices, an unexpected slowdown in consumer spending and disappointing job creation statistics have altered the mood.

Had the Reserve opted to hold steady on rates, it might have sent a message that the Fed was afraid the "soft patch" may turn out to be more severe. That would have created a difficult atmosphere for President George Bush as he fights to persuade voters that his economic policies are working and win their votes.