MercoPress. South Atlantic News Agency

Fed expected to raise rates for the tenth time

Money markets expect the United States Federal Reserve to raise interest rates once again Tuesday, for the tenth time running, with the purpose of containing inflation.

A stronger than expected labour market and an overheating of real estate operations has convinced analysts that the Fed will up rates by 25 points from 3,25 to 3,50%, "a trend which is expected to continue steadily until the end of 2005".

"The Fed rate will be at 4% or higher by the end of the year", forecasted Arthur Porcekansky an independent financial analysts.

Last week the US Labour Department announced the creation of 207,000 new jobs during the month of July consolidating forecasts that the US economy is picking up speed and ready for dearer loans.

"Strong employment growth means higher incomes, more confidence, greater consumption and further economic growth, while labour pressure begins to build into the market", added Mr. Porcekansky.

The Fed has been increasing interest rates 25 points at a time since June 2004 in an effort to find the equilibrium point for the economy. Until June 2004 the basic rate stood at 1%, a historic low since 1958, after having helped the US economy recover from recession and the impact of the September 11/2001 terrorist attacks.

But exceptionally low interest rates also triggered the real estate market and there are growing fears of a potentially unsustainable "bubble", plus the fact that long term bond yields have remained lower than forecasted.

This could be indicating the market believes interest rates will eventually begin to drop again in 2006 if the economy slows.

Whatever the reason, bets are that the Fed's Open Market Committee will be raising interest rates again.

Last week the European Central Bank left interest rate unchanged at 2% based on the latest Euro Zone surveys indicating encouraging signs of a recovery in European Union growth in spite of pressure from some of the EU main economies.

ECB president Jean-Claude Trichet argued it had been right not to lower interest rates.

"We feel, given our judgement on inflationary pressures and on price stability in the medium term, that these rates are exactly what we need" underlined Mr Trichet.