City welcomes US interest rate rise

Economists in London have welcomed the US central bank's decision to raise American interest rates by a quarter of a percent.

Analysts said the Federal Reserve's widely expected move to raise the federal funds rate to 1.25% from 1% - the first rise in four years - showed it was upbeat about the US economy.

They added that a decision to raise rates by a half-point could have spooked the markets and spelled trouble for investors.

The Dow Jones Industrial Average responded positively to the Fed's decision, moving from negative territory to a 24-point gain shortly after the announcement.

John Butler of HSBC said: "The fact we're seeing rates rise shows they are more confident about the US economy, which should be seen as positive for the UK economy."

Mr Butler added that he expected today's quarter-point rate hike to be followed by another 0.25 percentage point rise in August and for the Fed rate to reach 1.75% by the end of the year.

Simon Rubinsohn of stockbroker Gerrard agreed that a couple more quarter-point rises by the time of the US election in November would follow today's rise, with perhaps another rise by the end of the year or early in 2005. He said he believed US rates could move as high as 3.5% in a year's time, provided the American economy does not suffer.

"The Fed will move slowly because it wants to ensure it's doing the right thing," Mr Rubinsohn said. "I think also it will prove willing to reverse course if there are problems."

Mr Rubinsohn added that a half-point rise could have sent down shares in the US and Europe because of fears that the Fed was acting to keep a lid on rising inflation.

"I don't think a half-point hike would have been terribly good news for equities," he said.

The economy has been a hot topic in the presidential campaign with President George Bush insisting things are rebounding and Senator John Kerry talking about a squeeze on the middle class.

Analysts in the US said voters will likely see little impact on the economy between now and November from the Fed's action.

Fed policy-makers, wrapping up a two-day meeting, also held to the view that they could gradually raise rates to head off inflation.

The Fed said it believed any rate increases could be "at a pace that is likely to be measured."
The Fed made clear, however, that it would take more aggressive action if needed.