US Fed hikes interest rate yet again; hints at more increases

29 March 2006

The Federal Open Market Committee (FOMC) of the US Federal Reserve which met yesterday raised the benchmark interest rate by 25 basis points to 4.75 per cent per annum, as expected. This is the 15th straight rate hike, all by 25 basis points each, by the Fed from mid-2004 when the rate was as low as 1 per cent.

Yesterday's meeting was the first under the new Fed chairman Ben Bernanke. Those who were keenly waiting for any change in policy or outlook under the new chairman would have been disappointed as the Fed maintained its earlier stand on interest rate outlook.

The statement issued by the Fed clearly indicates that the US central bank continues to be concerned about inflationary pressures. "Possible increases in resource utilisation, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures", the statement said.

The US economy is expected to post strong growth for the current quarter ending 31 March, 2006 on increased spending to repair the hurricane damages. Unemployment rates have come down considerably and are currently below 5 per cent.

Despite a clear slowdown in the housing sector, consumer confidence in the US for the month of March rose to a 4-year high. However, inflation remains below 2 per cent even as oil prices are hovering close to record highs.

"Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace", the Fed statement said. The US economy is forecast to grow at an annual rate of 3.5 per cent this year as compared to 3.1 per cent for 2005.