Fed raises interest rates by quarter point as US trade deficit hits record

As the Federal Reserve nudged interest rates higher for the fifth successive time, the US reported an all-time record trade deficit for October - further evidence of the country's financial imbalances driving the dollar down against the euro and sterling.

As the Federal Reserve nudged interest rates higher for the fifth successive time, the US reported an all-time record trade deficit for October - further evidence of the country's financial imbalances driving the dollar down against the euro and sterling.

At its last meeting of the year, the central bank's policymaking Federal Open Markets Committee increased its key short- term target rate by 25 basis points to 2.25 per cent.

The move is the latest by the Fed chairman Alan Greenspan in his strategy of bringing US borrowing rates back to a historically more normal level, after cutting the benchmark fed funds target rate to 1 per cent last year, the lowest since the late 1950s. In a "steady-as-she-goes" statement, the FOMC said inflation risks were "well contained".

According to the Fed, the upside and downside risks to the economy are roughly equal, and the FOMC indicated it would continue to adjust rates at the "measured" pace of the past six months. Most analysts expect the central bank will push rates up gradually next year as well, perhaps to 3.5 per cent by the end of 2005.

If the Fed's rate increase was generally expected by the markets, the jump in the trade deficit was not. The October deficit hit an unprecedented $55.5bn (£29bn), bringing the 10-month deficit to $500bn, topping the figure for the whole of 2003. Though exports climbed 0.6 per cent in October to a new record of $98.1bn, higher oil prices helped drive imports 3.4 per cent higher to an unprecedented $153.5bn.

But other factors are weighing on the deficit. The US surplus on agricultural goods, a key export category, has all but disappeared. For the first time since 1959, the country may actually show a small deficit next year, some projections show.

The latest trade figures may spell more trouble for the dollar, increasing market worries that the "twin" US budget and current account deficits are unsustainable. The former tops $400bn, while the latter is running at an annual $650bn, a little less than 6 per cent of US GDP.

Speaking in Europe last month, Mr Greenspan warned that, left uncorrected, the deficits could lead foreign investors and central banks to move funds from the US to more stable and remunerative markets.