US rates up by a quarter point

The US Federal Reserve raised its key short-term rate for a 16th consecutive time today and gave no firm clue that the long-rumoured pause in the central bank's tightening policy was at hand.

The 25 basis point increase in the cost of overnight federal funds rate continues the tightening cycle that began in June 2004.

Since then the policy making Federal Open Market Committee (FOMC) has increased the fed funds rate from a 45 year low of 1 per cent, to 5 per cent yesterday, its highest level in five years.

In its minutely parsed statement, the only hint the FOMC gave was the addition of the word "yet", amending the previous meeting's language that further rates "may be needed", to "may yet be needed".

On Wall Street the Dow, which had been slightly lower immediately after the announcement, again moved slightly lower after the news.

But the FOMC, under Ben Bernanke, the Fed's chairman, made clear its actions would be determined by the course of the economy rather than any preset criteria.

"I don't think 5 per cent is enough to contain the inflationary invironment," Bill Gross, the head of PIMCO, a fund management group, said.

The decision is bound to push up credit and home-equity credit lines.

Longer-term rates have also risen, restoring a more normal yield curve, and banishing the "conundrum" that exercised Alan Greenspan, the former chairman, whereby longer rates were falling even as shorter term rates were rising.

The FOMC said US economic growth later this year was likely to moderate, reflecting the cooling of the housing market and higher energy prices.

Inflationary expectations, it said, were still "contained".

But the possibility of further increases in commodity prices had "the potential to add to inflationary pressures".

- INDEPENDENT