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US Federal Reserve Raises Interest Rates Again


The Federal Reserve, the U.S. central bank, Wednesday continued its two-year long effort to combat inflationary pressure by raising its short-term interest rate to five percent. Financial markets are now anticipating at least a temporary halt to the persistent tightening of monetary policy.

U.S. short-term rates are now three percentage points higher than they were two years ago. This means higher finance charges on credit card and variable interest rate debt. Since June 2004, the Federal Reserve has raised short-term rates at quarter point increments 16 times.

The central bank's Fed statement that accompanied the announcement said that the inflationary pressures resulting from the sharp increase in oil prices have so far been contained.

It said Fed policy will be guided by data measuring economic performance. Higher interest rates tend to slow economic growth by boosting the cost of credit. But monetary policy typically acts with a 10 to 15 month lag. Despite the rate increases, the US economy has been growing at a robust four percent pace and unemployment is low. The Fed statement called attention to a slowdown in the housing market, which is particularly sensitive to interest rates.

Bill Gross, a bond trader in Newport Beach, California, predicts the period of monetary tightening is coming to an end.

"We're going to wait on the data for the next two weeks or so, before the next policy decision meeting, and go from there," said Mr. Gross. "I think, however, that their statement that inflation is relatively contained is very much of a positive sign that they will pause instead of go further."

The Federal Reserve is keeping a close eye on international developments, particularly the declining value of the dollar and the sharp increase in commodity prices. Since its last interest rate rise in late March, the prices of gold, silver, copper and platinum have all risen sharply. Some analysts say the commodity price rise suggests mounting inflationary trends worldwide. Bond trader Gross says it is time for Europe and Japan to relieve some of the pressure on the Fed and begin to raise their own interest rates.

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