Markets surge as Fed limits US rate rise to quarter-point

Financial markets across the world surged last night after the US Federal Reserve raised interest rates for the 17th time in a row, but toned down its hawkish language.

The central bank left the door open to further rate rises, but said any further tightening would depend on the latest figures on growth and inflation.

It raised the overnight Fed Funds rate by a quarter-point to 5.25 per cent, the highest since March 2001. On Wall Street, the Dow Jones surged nearly 2 per cent, to 11,190.8, as lingering fears of a painful half-point rate rise finally vanished.

In its statement, it said: "Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risks remain.

"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth as implied by incoming information."

It softened its language slightly from its May decision, saying recent indicators suggested economic growth was "moderating", and dropping a reference to the strength of economic growth so far this year.

"The language strikes me as being a step back from the relentless hawkish talk the Fed has been engaged in on inflation," said Wan-Chong Kung, a portfolio manager at First American Funds in Minneapolis. "It's a balanced statement."

On Wall Street the stock market built on gains chalked up earlier in the day while the dollar fell as traders bet that the Fed was now unlikely to increase rates again next month.

The Dow rose 80 points within minutes of the decision, taking its gains to 178 points, or 1.63 per cent. The dollar weakened against the euro, which gained more than a cent to breach the $1.26 mark.

"We had some change in the language, and the dollar is coming off slightly, as I would expect," said Michael Woolfolk, senior currency strategist at Bank of New York. "There was not sufficient language in the statement to suggest a hawkish position. They are squarely data-dependent."

The chance of an increase in August, the next Fed meeting, had fallen to evens, he said. Traders will now focus on the Fed chairman Ben Bernanke's testimony to Congress on monetary policy in late July.

Emerging markets in Latin America that had suffered a sell-off by investors fearful of rising borrowing costs rebounded, with markets in Mexico and Brazil up more than 2 per cent.

Earlier, figures showed the US economy grew at an annual rate of 5.6 per cent in the first quarter, the fastest pace since summer 2003 and up from the first estimate of 5.3 per cent. But the Fed is facing signs economic growth is easing.