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Tuesday, 19 March, 2002, 21:41 GMT
Fed hints at rises to come
The US central bank, the Federal Reserve, has signalled that interest rates are likely to rise - but not quite yet.

It has announced that, due to the growing signs of economic recovery in the United States, it no longer believes that the risk of a recession outweighs concerns about inflation.

US GDP growth 2001
Q1 +1.3%
Q2 +0.3%
Q3 -1.3%
Q4 +1.4%

But it has left current interest rates unchanged at 1.75%.

In a statement, the Fed said that "the US economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace."

But, it added, "the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

As a result, the risks of inflation and economic growth were now "balanced."

Interest rates are at their lowest level in 40 years, after 11 rate cuts by the Fed designed to counteract the US economic slowdown.

The announcement is likely to lead to rate rises later in the spring - and worldwide moves by other central banks to raise rates.

Lyle Gramley, a former Fed governor, told the BBC that "we would eventually see interest rates rise around the world" as the expansion gathered pace - and he expected rates to rise slowly to around 4%.

On Tuesday, Swedens Riksbank was the first Western central bank to raise interest rates - by a quarter point - since the sharp economic slowdown in 2001.

Changing the balance of risk

For more than a year, the US Federal Reserve has taken the view that the prospects facing the world's biggest economy were grim.

In central bankers' jargon, the future risks were "weighted towards the downside".

And it had warned financial markets to expect more rate cuts - although it held off any changes in January.

But now the Fed has changed its view.

Recent data has shown higher industrial output, stronger consumer confidence and tentative signs of a recovery in the labour market.

US Federal Reserve chairman Alan Greenspan told a Senate committee earlier this month that "recent evidence increasingly suggests that an economic expansion is already well under way".

No rate rise yet

It is likely to be some months before the US Federal Reserve makes it more expensive for shoppers to spend by raising interest rates again.

Many economists are predicting May or June as the earliest likely date.

"We'll probably see the Fed watch the pace of the economy going forward. They're still concerned about final demand and if it holds up, we could see the Fed start to take back several of its interest rate cuts starting probably this summer," said economist Gary Thayer of AG Edwards.

Some predict the Fed's benchmark overnight lending rate could remain at its current 40-year low of 1.75% for most of this year.

"In our view, the unemployment rate is key to the timing of the Fed's initial move. Politically, the Fed probably can't start tightening until the unemployment rate has peaked," said Merrill Lynch chief economist Bruce Steinberg.

Stock and bond markets reacted calmly to the move, which had been anticipated.

Shares on the New York Stock Market, which had been near their highs for the year, fell back slightly.

Hopeful signs

Among signs that the recovery was gathering pace have been a rise in industrial output in February, up 0.4%, and solid consumer spending.

Excluding car sales, US consumer spending rose 1.2% in January and 0.2% in February.

Factory orders have begun to pick up as inventories are liquidated, and durable goods orders have been strong.

For the first time in seven months, the US economy added more jobs in February, though at 5.5% some economists think unemployment has not yet peaked.

Ian Shepherdson, High Frequency Economics
"I was a bit surprised at how blunt the Fed was about how strong the economy is."
See also:

07 Mar 02 | Business
Greenspan upbeat on US recovery
30 Jan 02 | Business
US keeps interest rates unchanged
24 Jan 02 | Business
Fed chief: US is on the mend
11 Jan 02 | Business
US economy faces 'significant risks'
03 Jan 01 | Business Basics
Alan Greenspan: market mover
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