US Fed increases rates to 1.75%

The Fed is not finding signs of slowdown

US interest rates have risen for the third time this year as the world's largest economy continues to show signs of a steady recovery.

The Federal Reserve increased its key rate by a quarter of a percentage point to 1.75% after its meeting on Tuesday.

It said the new level was "supportive" and "accommodative" to the economy.

The Fed also signalled it was willing to continue lifting borrowing costs from the record lows reached after a 2001 slowdown and the 9/11 attacks.

More?

"I don't see anything... that suggests they would not be willing go 25 basis points at every meeting between now and the end of 2005," said Cary Leahey, an economist at Deutsche Bank in New York.

Justifying its decision to make money more expensive, the Fed said that "output growth appears to have regained some traction, and labour market conditions have improved modestly".

It reiterated, however, that any change to borrowing costs would take place at a "measured" pace because it expects inflation to be "relativity low".

"They've indicated they will keep raising rates; the question is how quickly," said William Hornbarger, an economist at AG Edwards & Sons. "They've left themselves leeway to press forward in raising rates or to take a little bit of a break."

Flagged

Tuesday's move was widely expected.

A total of 13 cuts from January 2001 to June 2003 took the base rate to 1%, a half-century low.

Although the US is close to a million jobs short of where it was in 2001, recent employment data has shown something of a return to form.

August saw 144,000 net new jobs, the most since May - albeit a figure well short of what might have been expected three years into recovery.

Factory production is up and inflation under control, despite oil prices stuck well above $40 a barrel.

Another dose of good economic news came on Tuesday morning, when the Commerce Department said housing starts in August rose 0.6%.

Tradition

A presidential poll due on 2 November may complicate matters, analysts said.

To preserve its independence, the Fed has often tried to avoid shifting rates too close to an election to avoid the appearance of affecting the result.

But the perceived need to return rates to a more "neutral" position conflicts with that tradition.

And should the US economy keep improving, the Fed may have no choice but to take action.

"We have to begin discounting at this point the possibility the Fed hikes at both its meetings in November and December," said Michael Woolfolk, a currency strategist at Bank of New York.