MercoPress. South Atlantic News Agency

Fed sets basic “accommodative” rate at 3,25%

For the ninth time running, and as expected, the United States Federal Reserve raised the cost of money 25 basic points to 3,25%.

In the official release the Federal Open Market Committee argues that "pressures on inflation have stayed elevated, but longer term inflation expectations remain well contained" and therefore the stance of monetary policy "remains accommodative".

Thursday FOMC decision was anticipated early week by US Department of Commerce data indicating a robust performance of the US economy during the first quarter, 3,8% expansion, as well as the drop for the second week running, of unemployment claims. Personal income growth slowed to 0,2% in May following April's 0,6% with consumer spending remaining unchanged in May after a strong 0,6% rise in April.

So far the US economy seems to keep expanding with inflation subdued in spite of some not too encouraging forecasts. But the full impact of the renewed surge of oil prices has yet to be absorbed. United States faces huge trade, budget and current account deficits plus a potential housing bubble, which Fed chairman Alan Greenspan only acknowledges partially.

Actually spending in new housing during the first quarter of 2005 jumped 11,5%, three times the rate in the previous quarter. Half a century low interest rates has helped fuel a boom in house prices as homeowners their properties and increase their borrowing to fund consumer spending or home improvements.

According to the official release, "the Committee believes that, even after this action, (25 points increase) the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained".

"The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, 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; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern".

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 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".