Fed raises US interest rates by 0.25% to check inflation

The Federal Reserve Board has increased interest rates by 0.25 of a percentage point, in a bid to hold down US inflation.

The move, which was widely anticipated by financial markets, came despite doubts over the strength of the US economy cast by recent indicators.

The increase was the third 0.25 of a percentage point rise since June and brings the key Federal Funds rate to 1.75 per cent.

The decision to push rates up was made unanimously by the Federal Open Market Committee (FOMC) in its last meeting before the US presidential election on November 2nd.

Recent economic releases have raised questions about the pace of US economic recovery, with job creation running well behind expectations and weak retail sales.

However, in the statement accompanying yesterday's rate rise announcement, the FOMC said it believed that "after moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction and labour market conditions have improved modestly."

The statement was last night being closely examined by economic analysts, who have been concerned at recent economic figures, even though an increase in job creation figures for August had provided some encouragement.

They noted in particular the comment about output growth regaining "traction" as showing reasonable optimism about the outlook.

However the Federal Reserve statement went on to say that the committee perceives the upside and downside risk to the attainment of sustainable growth and price stability "to be roughly equal", indicating that some uncertainty remained in its outlook.

Reflecting the fact that interest rates were being increased in small successive steps from their historically low levels of 1 per cent, the FOMC said that it believes that "the stance of monetary policy remains accomodative ."

This is interpreted as meaning rates are still low enough to boost the rate of economic growth. However, the Fed left the way open for further increases, repeating its statement after earlier meetings that "policy accomodation can be removed at a pace that is likely to be measured."

This means additional increases are on the way, but the Fed has given no hint about the likely timing.

Some analysts believe that the Fed may now take a break from rate rises for a period until it is clear that what it has termed a "soft patch" in economic performance is clearly over.

The tone of the Fed's statement suggests that future rate increases will remain gradual.

It strikes a relaxed tone by saying that despite the rise in energy prices, inflation and expectations about future inflation "have eased in recent months."