Fed will raise rates again to halt oil price inflation

The Federal Reserve will increase US interest rates for the 12th time on Tuesday as Alan Greenspan and his colleagues seek to mitigate the inflationary impact of high oil prices, analysts say.

Fed rate-setters have been raising borrowing costs at what they call a 'measured' pace since mid-2004, when they were confident that the US economy had shaken off the after-effects of the dotcom crash.

With US inflation now at its highest rate since 1991, as high oil prices feed through to the cost of energy, central banks on both sides of the Atlantic have stressed their determination to keep prices under control.

'Next week's decision seems straightforward,' said Paul Ashworth of Capital Economics, who expects rates to continue rising from their current level of 3.75 per cent until they hit 4.5 per cent.

Fed-watchers will be analysing the statement released after the meeting for signs that there could be a pause in the rate-tightening cycle. But Lewis Alexander of Citigroup said the Reserve's decision-makers were unlikely to change course.

'The anti-inflation rhetoric from Federal Reserve policymakers has taken on a stronger, more explicit tone in recent months,' he said. 'We expect the Fed will continue on its current policy path.'

As the Fed prepares to push up borrowing costs, a Washington-based think-tank has warned this weekend that working Americans are not reaping the benefits of America's economic upturn.

The Economic Policy Institute says real wages are falling at their fastest pace since records began more than two decades ago. The EPI's Jared Bernstein said that real wages had fallen by 2.3 per cent in the past year.

'Overall measures of economic performance, such as gross domestic product, continue to perform well,' he said. 'Yet the wage and compensation results show that this growth is failing to show up in hourly earnings.'

'There is no evidence of an overheating labour market that needs to be cooled by Federal Reserve rate hikes,' he added. 'And the resulting stagnant hourly wages will make it hard for working families to truly get ahead.'

Official figures released on Friday showed that US GDP expanded at a healthy annual rate of 3.8 per cent in the third quarter of the year.