Bernanke raises US rates to 4.75 per cent

In its first policy-making session under Ben Bernanke, the US Federal Reserve raised short-term rates by a quarter point in its 15th straight hike - perhaps signalling in the process the current 21-month tightening cycle is close to an end.

The expected rise of 25 basis points took the overnight federal funds rate to 4.75 per cent, compared with 1 per cent in summer 2004, when rates stood at their lowest level since the Eisenhower era in the late 1950s.

All attention yesterday, however, was focused on the finely calibrated language of the statement accompanying the afternoon announcement by the rate-setting Federal Open Market Committee.

This time the wording will be even more minutely scrutinised than usual, not only for hints about the future course of rates, but also for clues about the style and intentions of Mr Bernanke, the former Princeton economics professor who took over from the legendary Alan Greenspan on 1 February.

The new chairman has a reputation as an inflation hawk.

He is an advocate of clearly stated inflation targets such as those followed by the European Central Bank, and a supporter of greater openness in the Fed's workings.

This, some analysts say, could see the FOMC giving a more detailed assessment of current economic trends.

In his early public appearances, on Capitol Hill and at specialist economic forums, Mr Bernanke has mostly impressed Fed watchers.

Unlike his predecessor, he expresses himself succinctly and in terms a layman can understand.

Yet he is also clearly aware of the pitfalls of speaking too clearly.

Thus far, he has avoided any market-jolting gaffes.

But his first FOMC meeting comes at a delicately balanced moment, amid sharply conflicting signals about where the economy is heading.

After growing a feeble 1.6 per cent in the final 2005 quarter, the economy is set to expand 4.5 per cent or more in the first quarter of this year, with some signs that core inflation is gathering speed.

New consumer confidence figures from the Conference Board yesterday showed a buoyant picture, leaping to 107.2 in March from an upwardly revised 102.7 in February.

"This is a very strong survey," Richard Iley, the senior economist at BNP Paribas, North America, said.

On the other hand the vitally important housing sector has stalled.

Home prices are levelling off across the US.

Should they start to fall, consumer borrowing and spending - largely financed by drawing on home equity - will decline.

This would place a significant brake on growth.

Most economists thus expect GDP growth to slow to little more than 3 per cent in the second half of 2006.

Even so, they believe the Fed will raise rates at least once more after this week, to a minimum of 5 per cent, before calling a pause.

"Ben Bernanke has yet to establish his credibility with financial markets as an inflation fighter," Peter Morici, the business professor at the University of Maryland, said.

"If the economy slows but inflation is harnessed, Wall Street will bestow laurels on him.

But if inflation gets out of control, it will make him the goat."Here too the signals are mixed.

Some contend that globalisation curbs the bargaining power of US workers and thus reduces inflationary pressures.

Since January, wholesale prices have risen at a 4 per cent annual rate, while petrol prices have recently jumped in line with a higher oil price.

Retail inflation is running faster than in 2005, at slightly more than 2 per cent.

Already, Mr Bernanke has sent a message that he will make inflation fighting his priority.

In a much-anticipated speech to the Economic Club of New York last week, he insisted the low level of longer-term rates - famously described as "a conundrum" by Mr Greenspan - did not necessarily signal an impending slowdown.

He was also relatively sanguine about the faltering housing market, suggesting rising incomes were a more important factor than rising mortgage rates in shaping consumers' outlook.

Mr Bernanke has also expressed more alarm than Mr Greenspan about the surging US budget and current account deficits.

The former is set to exceed $400bn ((pounds sterling)230bn) in fiscal 2006, while the latter is running at more than $800bn at an annual rate, almost 7 per cent of GDP.

- INDEPENDENT