US central bank raises interest rates

The Federal Reserve, the US central bank, shrugged off the possible economic effects of Hurricane Katrina yesterday and raised borrowing costs for the 11th time.

The Fed raised its benchmark Fed Funds rate by a quarter point, as generally expected, to 3.75%. It began raising rates from a 46-year low of 1% in June of last year, at what it has repeatedly described as a "measured pace", in an attempt to prevent robust growth causing inflation.

Some Fed watchers felt it may have kept rates on hold this month because of the uncertainty about the impact of Katrina. But a majority expected another increase in rates and felt a decision to break the pattern would have unsettled financial markets. The Fed said in a statement that Katrina would cause energy price volatility and "dislocation" to the US economy, potentially leading to cutbacks in spending, jobs and production.

But it said that while the hurricane had increased "near-term uncertainty", it did not pose a "more persistent threat".

The hurricane knocked out about 10% of the country's refining capacity and about a quarter of its oil production in the Gulf of Mexico and sent petrol prices sharply higher at US pumps.

Oil prices have recently touched record highs, putting upward pressure on inflation. But there was some relief yesterday from Opec. The oil cartel, on the first day of its two day meeting in Vienna, offered up every last barrel of its spare capacity in an attempt to reassure consumer countries over energy supply. That means putting an extra 2m barrels a day up for sale on world markets. The offer will last from the beginning of October for three months. It follows criticism from Gordon Brown that Opec should release more crude to prevent high prices damaging the global economy. Opec president Sheikh Ahmad al-Fahd al-Sabah said: "We're offering everything in our pocket and this is my message to Gordon Brown, if he would like to have it I would be happy to sell it to him." The Opec move contributed to a fall in oil prices in New York of $1.16 to settle at $66.23. They reached a record of $70.85 in Katrina's immediate aftermath.

The US is also facing worries over house prices, which are rising at record speed, making the Fed wary of leaving rates on hold. Data last week showed that US inflation rose 0.5% in August, the same as July, with the bulk of the rise being a leap in energy costs. Stripping those out leaves a so-called "core" inflation of 0.1%. But economists are fretting that the August numbers were collected before Katrina and rising energy costs since then could feed into higher core inflation in the next couple of months.

Consumer confidence has also been affected. Last Friday's Michigan index, the widely used measure confidence, plunged to its lowest since 1992, worse even than after September 11 2001. "What matters now is how actual spending reacts and where gasoline prices go from here," said Nariman Behravesh, chief economist at consultancy Global Insight. On the former, he said, consumer spending could remain subdued for some months as Americans are spending far more on petrol than they were a few months ago.

But he added that he thought the high point may have been already passed for petrol prices. "If this proves correct, confidence should recover and its September decline would signal a temporary slowdown in spending growth - but not a recession," he said.

Jan 2001 Fed cuts rates sharply, from 6.5%, in wake of dotcom bust

Sept 2001 Fed cuts rates further, from 3.5%, following attacks on World Trade Centre

June 2003 Rates cut to 46-year low of 1% in wake of second Gulf war

June 2004 Fed begins raising rates from 1% as economy recovers

August 2005 Hurricane Katrina strikes Gulf of Mexico