MercoPress. South Atlantic News Agency

Federal Reserve raised basic rate 25 points to 4.25%

The Federal Open Market Committee decided Tuesday to raise its target for the federal funds rate by 25 basis points to 4.25%. Most analysts had forecast the rise, the 13th consecutive increase, with the central bank wanting to keep the lid on inflationary pressures. In a statement, the Fed admitted some further monetary tightening would be needed.

Rates have steadily risen over the past 18 months and now stand at their highest level in four and a half years. Unlike in all previous statements, the Fed made no mention on Tuesday of the rate rises being "accommodative", a term is has used to indicate that rates were still low enough to boost economic activity. However the Fed is still expected to increase rates to 4.50% next year eventually peaking at 4.75%.

The official release said that "despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures".

"The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives".

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 5-1/4 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.

Analysts are currently watching the Fed particularly closely since Chairman Alan Greenspan is due to step down January 31 after more than 18 years in the job. Ben Bernanke, currently head of President George W Bush's Council of Economic Advisers and himself a former Fed governor, will be taking over.