Fed increases interest rates by a quarter-point

THE US Federal Reserve increased interest rates yesterday, but indicated that this might be its last move for some time.

The decision left financial markets uncertain, with some seeing it as confirmation of the Fed's anti-inflationary intent and hoping that it would be the last move of the year, while others noted that it expressed concerns about inflationary pressures in the labour market.

The Federal Open Market Committee voted to raise its target for the federal funds rate by 25 basis points to 5.5 per cent, and increased the discount rate by 25 basis points to 5 per cent. The impact of the increase in the less-used discount rate is to amplify and underscore its decision.

"Although cost pressures appear generally contained, risks to sustainable growth persist," the Fed said in a statement accompanying the move. "Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential. As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue." Set against those warnings, however, the Fed also signalled a pause for breath. It has raised interest rates three times this year, taking back the reductions of last year which followed signs of weakness in the international economy and liquidity problems in the US markets.

"Today's increase in the federal funds rate, together with the policy actions in June and August and the firming of conditions more generally in US financial markets over the course of the year, should markedly diminish the risk of inflation going forward," the Fed said. "As a consequence, the directive the Federal Open Market Committee adopted is symmetrical with regard to the outlook for policy over the near term."

This shift to a neutral bias in future policymaking, combined with the fact that there is concern about possible problems which financial markets may face as a result of the Y2K factor, mean that a shift at the Fed's next meeting, at the end of December, is unlikely.

The meeting had been surrounded by unusual uncertainty over the result, with Wall Street analysts split down the middle over whether the Fed should boost rates. The organisation itself had given few clear signals about its course of action, with Fed chairman Alan Greenspan indicating he wanted to maintain his freedom of manoeuvre.