MercoPress. South Atlantic News Agency

Fed hikes base rate to 3,5% and promises more

The Federal Reserve raised Tuesday the base interest rate 25 points to 3,5% and signalled that more gradual rate hikes can be expected since “pressures on inflation have stayed elevated”

This is the tenth consecutive rise from the bottom rock low of 1%, June 2004, and the highest level in almost four years.

Markets were anticipating the Fed's Open Market Committee decision and Wall Street reacted positively, even when analysts are forecasting a 4 to 4,5% basic rate by the end of 2005.

"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. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated", said the official release.

Last month Federal Reserve chairman Alan Greenspan told Congress that further rate increases were needed to make sure solid economic growth would not trigger inflation pressures.

"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".

With the US economy growing strongly the Fed not only fears the impact of ever growing energy prices but of the housing market, which so far seems to have been immune to the ten consecutive base rises since long term interest rates that determine mortgage rates so far have refused to move.

House price inflation in many parts of the US has made buying a home unaffordable for many US families.

From Crawford, Texas, President George Bush said the US economy was strong and the "foundation for sustained growth is in place", but sidestepped when asked about interest rates, "I trust the judgement of Chairman Alan Greenspan".

Overall economic growth in the US marked a solid 3,4% in the second quarter and in July the economy created 207.000 new jobs, making many analysts believe the GDP is expanding at a pace above 4% in the current quarter.