MercoPress. South Atlantic News Agency

Fed raises rate to 4% and anticipates more

Determined to keep inflationary pressures in check and in a move expected by market analysts the Federal Reserve decided Tuesday to raise interest rates for the twelfth consecutive time increasing the base rate by 25 points to 4%.

US rates are now at their highest in four years with prospects of continuing given the Fed's statement that it will proceed with monetary policy at "a pace that is likely to be measured", with analysts anticipating 4,75% to 5% by next spring.

JP Morgan economist Anthony Chan said that at that point rates could reach the neutral level targeted by the Federal Reserve to attain sustainable growth and price stability. Economist Roger Kubarych from German bank HVB's New York branch said the main inflationary threat comes from the real estate market, since house prices on average have risen 13% in the last twelve months to June.

In a unanimous decision the Federal Open Market Committee said that "elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain 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; 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 5 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.