MercoPress. South Atlantic News Agency

Federal Reserve raises interest rate to 1,25%.

Stating that the “risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal”, the United States Federal Reverse Open Market Committee announced this Wednesday, after two days of deliberation that it decided to raise its target for the federal funds rate by 25 points to 1,25%. Rates were at its lowest since 1958.

The rise is the first in nearly four years and Fed officials has hinted for several months that a rise was imminent. The response from analysts and investors was positive since this means the Federal Reserve is confident about the US economy which is growing at a "solid pace" and the recovery of the job market. Market analysts also believe that if payrolls, employment and the price index strengthen further the Fed will be considering a number of small rates rises this year an in 2005, possibly at 50 points base move.

The FOMC release says that "the Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the inter-meeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors".

"The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability".

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole. FOMC is scheduled to meet again August 10 and September 21.

In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco