Fed raises interest rates for sixth time

The Federal Reserve, America's central bank, yesterday raised interest rates for the sixth time since last summer as it gradually tightens policy to keep the US economy growing without causing a rise in inflation.

The move, which had been expected in financial markets across the globe, took the Fed funds overnight interest rate up a quarter-point to 2.5%. The Fed, under chairman Alan Greenspan, began raising borrowing costs last June after cutting them to a 45-year low of 1% as it tried to head off the effects of the 2001 terrorist attacks on the US economy.

Crucially, the central bank maintained its statement that it would continue to raise interest rates gradually, in the same language it has used at its previous five meetings.

"The committee believes that policy accommodation can be removed at a pace that is likely to be measured," the federal open market committee (FOMC) said.

The dollar, which has been relatively steady so far this year after falling sharply in the last quarter of 2004, nudged slightly higher after the announcement to $1.885 against the pound.

Parul Jain at Nomura Securities in New York said: "The Fed is staying on the expected route for now ... there was no change in language and no change in tone."

Financial markets expect the bank to continue raising rates and are pricing in a rate of 3.5% by the end of 2005, though that will depend on the pace of growth in the US economy. Figures last week showed economic growth slowed to an annualised 3.1% in the fourth quarter of last year - impressive by international standards but down from 4% in the third quarter and the slowest since early 2003. The commerce department said this week the number had been skewed by incorrect trade data from Canada and would be revised. Economists think the growth number could be pushed up half a percentage point.

Officials on the FOMC are believed to have discussed some sort of inflation-targeting system similar to Britain's. The Fed has no inflation target and Mr Greenspan opposes one.

Several FOMC members are in favour. The minutes of the meeting, released on February 23, will be examined for clues about whether the bank may move to target inflation more directly.

Earlier on Wednesday, the US Treasury said it would sell a further $51bn of debt securities next week, a measure of America's needs to continue attracting foreign capital to finance its budget deficit.

Gordon Brown said yesterday that a meeting of financial officials from the G7 would push the US to take steps to reduce its budget and current account deficit.