US Fed hikes rates again

As expected, the US Federal Reserve in its meeting yesterday raised short- term interest rates by 25 basis points to 4.5 per cent annually. This is the 14th straight rate hike in less than two years from as low as 1 per cent during the first half of 2004.

More importantly, in its policy statement following the announcement, the Fed said "some policy firming may be needed" to manage inflation and ensure steady economic growth. This is a significant change from its earlier statements that interest rates is likely to rise at a "measured pace". With this change in language, the US central bank is keeping its options open for its next scheduled meeting by the end of March.

The statement also said US economic growth "appears solid" even though recently released economic date is "uneven". "Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilisation as well as elevated energy prices have the potential to add to inflation pressures", the statement added. By resource utilisation the Fed means job growth which increases consumer demand.

Despite high oil prices, core inflation in the US has remained under control. Even the surge in real estate prices, something the Fed has been worried about in the recent past, seems to be cooling off. US GDP growth for the last quarter of 2005 declined to just 1.1 per cent after growing more than 3 per cent each for the previous quarters.