The Federal Reserve last night raised interest rates by a quarter point to 3 per cent, responding to mounting inflation pressures while expressing confidence it can contain them with "measured" increases.
The US central bank's policy-setting Federal Open Market Committee unanimously voted to lift the benchmark federal funds rate - which affects credit costs throughout the economy - for an eighth straight time, as expected.
The Fed said spending had slowed in the face of higher energy prices but that the job market is improving.
Significantly, policy-makers repeated their expectation that policy stimulus can be removed at a gradual, or "measured," pace - wording generally taken to mean a diet of smaller, quarter-point hikes rather than bigger ones.
The Fed has indicated its concern about rising prices as the economic expansion matures, apparently a worry acute enough to override some recent signs that growth may be flagging and to keep interest rates on an upward trajectory.
"Pressures on inflation have picked up in recent months and pricing power is more evident," the Fed said a statement outlining its rate decision, which also increased the largely symbolic discount rate to 4 per cent.
Stock and bond prices ticked lower after the Fed's announcement while the dollar firmed.
The central bank said that with, "appropriate monetary policy action," risks to the US economy would remain balanced between weaker growth and higher prices.
The economy has grown steadily since a brief 2001 downturn but the pace is moderating under the impact of more costly energy.
In the first quarter this year, expansion in gross domestic product eased to a 3.1 per cent annual rate from 3.8 per cent in the final quarter last year.
More troubling to the Fed is that prices, measured by the Fed's favoured gauge - the personal consumption expenditures price index excluding food and energy - rose at an annual rate of 2.2 per cent in the first quarter, the fastest since the end of 2001.
Policy-makers worry about the corrosive impact of price rises on the economic expansion, since they potentially filter through every layer of activity, from factories buying steel to consumers filling up their gas tanks.
While prices are picking up, wage growth is near a standstill. Last week, the Labor Department said worker wages in the first quarter edged up a razor-thin 0.6 per cent - keeping the 12-month rise at 2.4 per cent.
The Fed initiated a gradual course of interest-rate rises last June, when overnight rates stood at a 1958 low of 1 per cent reached after 13 cuts that wrapped up in June 2003.
Economists say a neutral fed funds rate lies somewhere between 3 and 5 per cent but the Fed has been loath to be specific as it assesses the course of growth and price rises. - (Reuters)
