Fed raises US rates again in war on inflation

The US Federal Reserve raised interest rates another quarter of a point yesterday for the 10th consecutive time since June 2004 in an effort to keep inflation in check in the robust US economy.

The widely anticipated increase brings the benchmark federal funds rate to 3.5%, up from 3.25% in June. The official statement from the Fed suggests more rises are likely and indicates it will continue to act at a "measured" pace.

The Fed chairman Alan Greenspan, who is expected to retire in January, has been notoriously hawkish on inflation. US interest rates dropped to 1%, a 40-year low, after the dotcom bust of 2000 and the September 11 2001 attacks, but the Fed has been quick to counter any signs of inflation in wages or housing over the past year. Many analysts predict US interest rates will be 4% or even 4.25% by December. By contrast, rates in Britain are 4.5% and those in the eurozone are 2%.

Peter Spencer at Ernst & Young said: "It is clear that the US economy is weathering the slowdown in the global economy better than the UK, with its GDP growing twice as fast as the UK's in the second quarter, allowing the Fed to continue gradually to tighten monetary policy while the Bank of England has reduced rates here."

The world largest economy continues to boom, according to all the major economic indicators released recently. US economic growth was a strong 3.4% on an annualised basis in the second quarter of 2005, well above its long-term average. US consumers are still shopping with retail sales up 1.7% in June and unemployment has held steady at 5% over the past few months.

Despite steady growth and record high oil prices, the US economy has thus far tempered any major inflationary pressures. Both consumer and producer price inflation remained steady in June.

"Core inflation has been relatively low in recent months and long-term inflation expectations remain well contained, but pressures on inflation have stayed elevated," said the official Fed release.

The Fed has been paying especially close attention to wages and the housing market. Last week the US government announced non-farm employment grew by 207,000 in July, well above Wall Street predictions of 183,000. This year 1.3 million jobs have been added and non-farm business wages are up 6.3%.