Wall Street share prices fell sharply on the news. The Dow Jones index, up more than 20 points before the announcement, reversed the day's gains to close 3.37 down at 3,826.36 points. The dollar rose 1.13 pfennigs to DM1.5558.
The Reserve's Federal Open Market Committee raised rates by three-quarters of a percentage point, exceeding Wall Street expectations of a half-point rise.
In spite of five increases in rates since February, the US economy appears still to be growing at an annual rate of about 3 per cent. Influencing the Fed yesterday was news that US industry is operating at 84.9 per cent of its capacity, the highest level for almost 15 years and close to the point where bottlenecks trigger inflationary pressures.
Some experts had argued in vain that the Fed was overreading the indicators and strong growth might not mean inflation because of the changed nature of the American economy, with less manufacturing and stronger foreign competition. ``They are fighting yesterday's war,'' said James D Robinson, former head of American Express.
The decision will not be welcomed by the Clinton administration, battered by the strong Republican gains in last week's elections. Before the announcement President Bill Clinton, who has highlighted to voters the strong economy and low unemployment rate, said he hoped the Fed would ``do their best to keep the economy going''.
The Fed's action will take short-term rates in the US to their highest level in three years. The Fed said it was raising its discount rate - the rate it charges banks for loans - to 4.75 per cent immediately.
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