Fed raises US interest rates but signals change of mood

The US central bank, the Federal Reserve, bumped up interest rates by a quarter of a point to 4.25% last night, the highest level since the middle of 2001, but hinted it may soon end its string of rate rises.

The increase was the 13th successive rise since the Fed began to raise rates from a 46-year low last year and comes as veteran Fed chief Alan Greenspan prepares to step down after 18 years at the helm of the world's largest economy.

The Fed made a subtle but important change to the language in its statement justifying the decision. Since it began raising borrowing costs last year, the Fed has repeatedly said it would remove "policy accommodation" at a "measured pace". But it had hinted in the minutes of its meeting last month that that language could soon be changed as it approached a more normal level of interest rates.

Yesterday it dropped the word "accommodation", saying instead, "further measured policy firming is likely to be needed". Financial markets reacted swiftly to the change of tone, with bonds and stocks moving higher as markets speculated that the Fed may soon approach the end of its current rate-rising cycle. The dollar lost ground on the foreign exchanges.

The Fed has been raising rates in an effort to rein in an economy which grew at an annualised 4.3% in the third quarter, more than twice the pace in Britain or the eurozone, and shrugging off the effects of a series of hurricanes which hit the US Gulf Coast.

US retail sales in November, which were published hours before the Fed announcement, were slightly weaker than expected, rising only 0.3% on the month. That might be a signal that consumer spending will contribute less to growth in the fourth quarter, economists said, although once weak sales of gasoline were stripped out, spending remained robust.

Mr Greenspan will chair his last Fed rate meeting at the end of January, to be replaced by George Bush's chief economic adviser Ben Bernanke.