Fed lifts US rates by quarter of a point

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The Independent Online

The Federal Reserve raised its key short-term rate for a 16th consecutive time yesterday and gave no firm clue that the long-rumoured pause in the central bank's tightening policy was imminent. The 25-basis-point increase in the cost of the overnight federal funds rate to 5 per cent continues the tightening cycle that began in June 2004.

In its minutely parsed statement, the only hint the policymaking Federal Open Market Committee gave was the addition of the word "yet", amending the previous meeting's language that further rises "may be needed" to "may yet be needed".

On Wall Street, the Dow was unmoved, ending up 2.8 at 11,642.6, while the dollar fell to a one-year low of $1.2838 against the euro. The greenback, however, pared some losses later after the US Treasury announced it would not name China as a currency manipulator despite pressure to do so from Congress. It did, however, stress that the US was "extremely disaffected" that China has not allowed its renmimbi to appreciate faster.

The FOMC said US economic growth was likely to moderate, reflecting the cooling of the housing market and higher energy prices. Inflationary expectations, it said, were still "contained". But the possibility of further increases in commodity prices had "the potential to add to inflationary pressures". Thus "some further policy firming may yet be needed". The key, it stressed, would be the actual economic data. The Fed expects growth to slow from the first-quarter's 5 per cent to 3.5 per cent for the rest of the year.

The markets are also finding it hard to "read" Ben Bernanke, the new Fed chairman, who said he had been misinterpreted after traders recently took comments that the Fed could take a brief break from raising rates "at some point in the future" as a sign the tightening cycle was close to an end.