Fed puts the brakes on US economy

The US Federal Reserve raised interest rates by a quarter point last night, in an attempt to apply the brakes against the risk of inflation as the world's biggest economy continues to recover.

The US Federal Reserve raised interest rates by a quarter point last night, in an attempt to apply the brakes against the risk of inflation as the world's biggest economy continues to recover.

The increase, which brings the key federal funds interest rate to 2 per cent, marked the fourth rise this year and was part of the Fed's decision to increase the cost of borrowing at a "measured" pace.

In its accompanying statement, the Fed said: "Output appears to be growing at a moderate pace despite the rise in energy prices, and labour market conditions have improved. Inflation and longer-term inflation expectations remain well-contained."

Analysts said the sentiment was almost identical to the central bank's view before yesterday's increase, making it likely the rate-setting body would tighten rates again in December to keep the economy growing in a controlled way.

Kurt Karl, the head of economic research at Swiss Re in New York, said: "I still have December as 25 basis points. I have heard some people indicate that the Fed doesn't like to do it in December because of liquidity needs at year-end but they did it in 1988 so it is not off the cards. I expect they will do it, and two more in the first quarter."

On Wall Street, expectations of another rates rise in December saw the Dow Jones end flat at 10.385.50.

There has been a string of data in recent days showing robust economic growth in America. Figures last week showed the economy created 337,000 new jobs in October, double Wall Street forecasts.

Just before the meeting started, the US government said that the trade deficit narrowed in September to $51.6bn from $53.5bn in August thanks to a record volume of exports. The surge in exports is likely to have been driven by the fall in the dollar and could be enough to lead to an upward revision in GDP for the third quarter.

Separately, retail sales surged an unexpectedly strong 1.5 per cent in September, showing that consumer spending was still growing. Weekly claims for jobless pay had risen by a smaller number than anticipated, underlining the view that the economy has emerged from what Alan Greenspan, the chairman of the Fed, had described as a "soft patch" for the US economy.

The euro briefly broke through the $1.30 barrier against the dollar to a fresh record high on mounting fears that the US current account deficit is unsustainable, before the upbeat trade and employment figures triggered a rebound in the dollar. Italy's economy minister, Domenico Siniscalco, told reporters there had been "talk" about co-ordinated intervention by central banks to curb the dollar's fall.

The European Central Bank, the Bank of England (BoE) and the German Finance Ministry all declined to comment.

Earlier, Mervyn King, the BoE's Governor, said he hoped the UK government would use its presidency of the Group of Seven nations next year to push for talks between the G7 and China, which has fixed its currency to the dollar, about resolving the global imbalances.

But in a sign global trade imbalances remain far from resolved, the politically sensitive US trade gap with China set another record at $15.5bn, as imports from the Asian manufacturing powerhouse rose to $18.4bn.