WASHINGTON - The Federal Reserve raised US interest rates yesterday for the 12th straight time, from 3.75 per cent to 4 per cent, taking them to the highest level in more than four years and indicating more rises will be needed to keep inflation at bay.
Once again, the Fed said it was worried high energy prices could add to inflation pressures, although it said inflation outside of food and energy prices, and expectations of future inflation over the long-haul, were still contained.
The Fed has been aiming to bring short-term rates to neutral - a rate that neither hinders growth nor fires inflation - to sustain the economy's expansion.
Exactly where that level is remains unclear, though private-sector analysts speculate it's around 4.5 per cent.
Meanwhile, economic growth has remained durable in the face of costlier energy and the damage to the US Gulf Coast region caused by Katrina and late-September's Hurricane Rita.
Oil prices that had jumped to a record US$70.85 ($102) a barrel shortly after hurricane Katrina struck in late August were below US$60 yesterday.
The Government said last week that growth in gross domestic product - a gauge of total goods and services output within US borders - accelerated to a 3.8 per cent annual rate in the third quarter from the second quarter's 3.3 per cent.
So far, higher interest rates do not seem to be affecting a sizzling housing market.
The Commerce Department said yesterday that construction spending climbed 0.5 per cent in September to a record annual rate of US$1.12 trillion, largely because of more home building.
In the statement outlining its action, the Fed said upside and downside risks to its twin goals of sustainable growth and price stability remained "roughly equal".
The central bank's policy-setting Federal Open Market Committee also reiterated it would focus on data in making its future rate decisions, even though it thought a gradual course of increases was the most likely outcome.
In concert with its action on the key overnight rate, the Fed lifted the largely symbolic discount rate a matching quarter-point to 5 per cent.
The US central bank is widely expected to keep raising rates at least through the tenure of present Fed chairman Alan Greenspan, which ends in January. The remaining two meetings under the Greenspan era are scheduled for December 13 and January 31.
Betting was about even in futures markets that President George W. Bush's nominee to replace Greenspan, former Fed Governor Ben Bernanke, will oversee one more rate rise in March when he chairs his first policy-setting meeting.
- REUTERS
Fed lifts rates another notch
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