The U.S. central bank, the Federal Reserve, Wednesday continued to gradually move short-term interest rates higher, raising the overnight federal funds rate one quarter point to two percent.
It is the fourth one quarter point increase in five months. The cumulative one percent rise to two percent still leaves short-term interest rates below the three percent inflation rate. In its statement, the federal open market committee said the economy is showing strength despite the sharp run up in gasoline prices.
It said inflationary pressures are being contained. Bill Gross, who manages the world's biggest bond investment fund in California, believes the central bank is signaling that there will be at least one more rate increase in the months ahead. "You know what the Fed is trying to do is balance unemployment and inflation," said Bill Gross. "They're looking for that sweet spot, the neutral fed funds rate. And it appears that in the Fed's view it is not at two percent."
After oil prices doubled in the past year some economists were predicting that the central bank would go slow in future rate rises because of weakness in the economy. However, last Friday's positive jobs report, which showed far more jobs being created than had been expected, may have influenced this week's decision to raise rates.
As the world economy slowed in 2001, the U.S. central bank aggressively cut interest rates, dropping the fed fund rate 13 times over a 30-month period. The now-recovering U.S. economy is currently growing at about a four percent annual rate.