Inflationary concerns as Fed raises interest rates

The US Federal Reserve yesterday added a quarter point to the overnight lending rate which rises to 5.75 per cent and expressed mild concern about future inflation.

The discount rate on Fed lending to commercial banks was also raised by a quarter point to 5.25 per cent.

The increase in the bank lending rate had been widely anticipated. The Dow Jones industrial average had already risen by more than 300 points this week before yesterday's announcement. It slipped into negative territory shortly after the Fed's move before recovering but closed down 37.85 at 11,003.2.

The Fed's decision was expected to trigger an increase by the commercial banks of their prime lending rate from 8.5 per cent to 8.75 per cent.

The statement issued after the two-day meeting of the Federal Open Market Committee expressed concern about excess demand growth and raising the possibility of a further interest rate rise at the next Fed meeting in March.

Yesterday's interest rate increase was the fourth successive one by the Fed since last June when the rate stood at 4.75 per cent.

There had been some speculation that Fed chairman Mr Alan Greenspan would press for a half percentage point increase to stem inflationary pressures as the US economy enters its 107th month of non-stop growth.

The Fed statement said the committee "remains concerned that over time increases in demand will continue to exceed the growth in potential supply even after taking account of the pronounced rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion".

The statement added: "Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the committee believes the risks are weighted mainly towards conditions that may generate inflation pressures in the foreseeable future."

This statement is not seen as guaranteeing there will be further interest rate increases but it does warn the market that the Fed is concerned about inflation dangers.

The economy grew at a 5.8 per cent annual rate in the last three months of 1999 and by 4 per cent for the whole year.

This growth has helped push down unemployment to 4.1 per cent, the lowest level in 30 years. The January figures due out tomorrow may record an even lower unemployment rate.

US President Bill Clinton commenting on the record boom has expressed concern about the burgeoning trade deficit which for 1999 is expected to be about $267 billion or $100 billion up on 1998 which was itself a record.