Money Matters

Washington, Aug. 10 (Reuters): The Federal Reserve raised a key US interest rate a quarter-percentage point on Tuesday, offering no sign after a 10th straight rise that it was ready to end its campaign of modest increases to curb inflation.

The US central bank’s policy-setting Federal Open Market Committee unanimously voted to lift the benchmark federal funds rate, which can sway borrowing costs throughout the economy, to a four-year high of 3.5 per cent.

The panel said rates are still low enough to lend support to the economy and repeated that it expected to continue to remove monetary stimulus at a “measured” pace, suggesting further quarter-point moves ahead.

In an effort to head off inflation risks in a growing economy, the Fed began in June 2004 to push up the federal funds rate that banks charge each other for overnight loans from a 1958 low of 1 per cent.

The fed funds rate has risen 2.5 percentage points over that period and economists expect it to hit 4 per cent or higher by year end.

“Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labour market conditions continue to improve gradually,” the Fed said in a statement outlining its decision.

“Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated,” it added.

The rate rise comes after a slew of data showing the US economy’s pulse quickening despite record energy prices and climbing short-term borrowing costs.

US gross domestic product grew at a solid 3.4 per cent rate in the second quarter. While that was a touch slower than the first-quarter pace, economists said it was particularly impressive in light of a big fall in business inventories.

Forecasters expect US producers to ramp up output during the rest of the year, ensuring robust growth, after American companies met a surge in demand by selling down inventories.

Vigorous auto sales, which soared to their second-highest level on record last month, solid job growth and signs of a pick-up in manufacturing burnished a rosy economic picture.