Fed poised to raise interest rates

The US Federal Reserve was tonight expected to raise interest rates for the first time in four years, amid signs that the US economy has finally begun to generate jobs.

The move has been widely anticipated because the fed chairman, Alan Greenspan, and his colleagues have carefully laid the groundwork for it.

Markets expect the Fed to raise borrowing costs by a quarter point, to 1.25%, in what will be the start of "measured" rate rises to head off inflationary pressures.

Tonight's increase will be the first upward move in US borrowing costs since May 2000, ending a period of historically low rates.

The Fed had slashed rates to 1% in response to a variety of factors including the bursting of the internet bubble, the September 11 2001 terror attacks on New York and Washington, and the threat of deflation last year.

It faced criticism for not having raised rates sooner, but had waited to make sure that economic recovery was finally translating into jobs. The US economy is now generating 250,000 jobs a month following a period dubbed the "jobless recovery".

It is widely believed that Mr Greenspan - whose rate rises during the early 90s have been cited as one reason why George Bush Snr did not win re-election in 1992 - has delayed tightening policy because an election is looming in November.

The most recent economic data point to a pickup in economic momentum. On Tuesday, the US labour department reported a 0.6% rise in consumer prices in May, the largest increase since January 2001.

Over the past three months, consumers have seen prices rise 5.5% on an annualised basis - the highest inflation rate since the late 90s.

Another report by research group the Conference Board, released on Tuesday, said US consumer confidence was at a two-year high.

The markets expect the Fed to increase interest rates to 2.25% by the end of the year, and to 3.75-4% by the end of 2005 - a "neutral" level at which it has its foot neither on the accelerator nor the brake.