US interest rates up 0.5%

Fed chief Greenspan aims to keep inflation down

US interest rates have been raised by half a percentage point to 6.5%.

That is the biggest increase seen in five years, and is an attempt to slow the booming economy.

The committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future

Fed statement

The American central bank, the Federal Reserve, announced the decision at 1415 local time (1815 GMT).

It was the sixth time rates have been increased since last June. The previous five rises had all been by 0.25%.

By the time the decision was announced US stocks had risen sharply on hopes that the current series of interest rate rises was near an end.

The Fed's decision had been widely expected

This had been prompted by lower than expected inflation figures for April.

Those hopes were dimmed by the statement from the Fed which said it remained concerned about growing inflationary pressures.

But after a brief dip the markets bounced back with the Dow Jones Industrial Average closing up 126.8 points at 10,934, and the Nasdaq ending up 109.9 points, or more than 3%, as the close approached.

The Fed's four paragraph statement said they remained worried about increases in demand for goods exceeding increases in supply.

This remained the case despite new technology bringing in a series of "productivity-driven gains in potential supply".

"The committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance," it said.

This is negative, extremely negative ... we've probably got a series of rate hikes after this

Steve Frenkel, analyst

"Against the background of its long term goals of price stability and sustainable economic growth and of the information already available, the committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

Production steaming ahead

The US is enjoying its longest economic expansion and fears linger that the Fed's rate rises have not been enough to keep inflation at bay or slow the economy.

Unemployment rates have fallen to their lowest levels since 1970 and the economy continues to grow at an annual rate of more than 5%.

On Monday, fresh data showed that US industrial production was rising at its fastest rate for 19 months.

The only question which had remained was by how much the Fed would raise rates - whether by 0.25% or, as widely expected, by 0.5%.

In addition to the inflation data for April - with the Consumer Price Index unchanged - retail sales are falling, producer price inflation is on the wane and demand for housing is slowing.

Higher rates, cooler economy

Increasing interest rates is seen as the best way to stop an economy from overheating, a move needed to reduce the chances of inflation taking a grip.

By increasing interest rates, consumers find it costs more to borrow money to buy everything from houses and cars to a new television.

This, in theory, leads to a drop in spending and so an overall dip in economic growth.

The view of analysts was that there were likely to be more rate rises to follow.

Steve Frenkel, chief market strategist with Ladenburg Thalmann, said: "The Fed clearly feels that it sees inflationary pressures.

"That's not a positive, and this won't be the last rate hike. They didn't change their bias. This is negative, extremely negative. This tells you we've probably got a series of rate hikes after this."