Fed raises interest rates to ward off inflation

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The Independent Online
THE United States Federal Reserve last night raised its leading interest rates by half a percentage point, higher than had been expected, to restrain the robust American economic expansion and reduce the prospect of accelerating inflation.

The US central bank lifted its benchmark Federal Funds rate to 4.25 per cent and for the first time in more than five years raised its largely symbolic discount rate to 3.5 per cent.

The decision was greeted with immediate approval by the US financial community. Wall Street stocks roared ahead on the belief that the decision had ended for now a series of monthly interest rates increases begun in early February. The Dow Jones Industrial Average leapt by 49 points to 3720 by the close of trading in New York. US government bond prices also rallied sharply, signalling that the market believed the decision to raise rates more sharply than some had expected would be enough to curtail future inflation pressures. The decision came too late to affect the UK markets.

American inflation rate is running at 2.4 per cent. But the economy is thought to be growing fast enough to speed up the inflation rate in the months ahead.

Yesterday's increase was the largest announced by the US central bank this year, and the Fed hinted yesterday it might be the last for a little while.

Higher US rates are unlikely to have any immediate impact on interest rates here. But because the British recovery is now firmly established, higher US rates may reinforce the impression that the era of falling rates is over and it may be just a matter of months before base rates have to rise.

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