The Federal Reserve raised US interest rates yesterday for an 11th consecutive time, signalling more increases to come and saying that Hurricane Katrina will provide only a temporary setback to the broad economy.
But Fed board governor Mark Olson dissented from the rate rise vote, saying that he preferred to hold borrowing costs steady. This was the first such dissent since June 2003.
In a nine to one vote, the policy-setting federal open market committee opted to increase the benchmark federal funds rate charged on overnight loans between banks a quarter of a percentage point to 3.75 per cent.
In a statement outlining its decision, the Fed said US spending, production and employment will suffer a near-term knock from Katrina and that energy prices may be elevated and volatile.
"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat," the open market committee said in a statement.
US treasury bonds fell in the wake of the decision, while the dollar held steady and stock markets were mixed.
The Fed funds rate now stands at their highest level since June 2001, although market-set long-term rates remain low by historical standards.
"Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained," the Fed said.
By the time the meeting convened yesterday, earlier speculation that the damage wrought by Katrina might prompt a hiatus in the rate rise campaign had died down and an increase was widely expected.
In the statement outlining its action, the Fed said that with appropriate monetary policy, upside and downside risks to its twin goals of sustainable growth and price stability should remain "roughly equal".
In concert with its action on the key overnight rate, the Fed lifted the largely symbolic discount rate a matching quarter-point to 4.75 per cent.- (Reuters)
