US Fed hikes interest rates to 2.75%, says inflation risks high have risen

Washington, March 23 | Updated: Mar 24 2005, 05:30am hrs
The Federal Reserve raised a key US interest rate a quarter percentage point to 2.75% on Tuesday, conceding inflation risks were growing but expressing confidence gradual rate rises can contain prices.

The central bank's policy-setting Federal Open Market Committee voted unanimously to raise the benchmark federal funds rate - which affects credit costs throughout the economy - for a seventh straight time since the current rate-rise campaign began last June.

The Fed said it could keep raising short-term borrowing costs at a measured pace, implying further modest quarter-point increases instead of larger ones financial markets had begun to brace for.

But with a subtle shift in wording, policy-makers made clear they were not complacent about prices and gave themselves leeway to act swiftly if necessary.

Though longer-term inflation expectations remain well-contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices, the Fed said.

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, read the statement outlining the central bank's decision, which also increased the largely symbolic discount rate to 3.75%.

Bond and stock prices sagged as the Fed stiffened its commitment to keep prices steady.

Prices for 30-year US Treasury bonds fell more than a full point while yields, which move in the opposite direction, climbed to 4.91%. Prices for 10-year notes fell 30/32s of a point and the yield rose to 4.65%, the highest since last July.

Investors interpreted the Fed statement as more hawkish about inflation, implying a higher risk of faster increases in credit costs which sapped hopes for rising corporate profits.

The Dow Jones industrial average tumbled 94.88 points, or 0.90%, to end at 10,470.51. The Nasdaq Composite Index fell 18.17 points, or 0.91%, and finished at 1,989.34.

The Fed is now implying that if they tighten policy as appropriate then price stability would be secured, but not if policy is left accommodative, said economist Alan Ruskin of 4CAST in New York.

Before the decision, financial markets had been particularly focused on how the Fed characterized its expectations for future policy movements and some economists had thought policy-makers could drop the measured pledge.

The economy's steady advance since the 2001 recession has gained pace in recent quarters. This has fanned fears of building inflation pressures, especially in view of soaring prices for housing, commodities and energy.