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Last Updated: Wednesday, 30 June, 2004, 19:07 GMT 20:07 UK
Fed raises interest rate to 1.25%
The US Federal Reserve has raised interest rates by a quarter percentage point, in a widely-anticipated move.

The rise is the first in nearly four years, and is a means of curtailing inflation as the US economy continues to grow.

The benchmark rate has been increased to 1.25%, from the previous 1% - its lowest level since 1958.

Fed officials, including chairman Alan Greenspan, have hinted in previous months that a rise was imminent.

The move was welcomed by analysts and investors in the US and UK.

The fact we're seeing rates rise shows they are more confident about the US economy, which should be seen as positive for the UK economy
John Butler, HSBC

The announcement came after a two-day meeting of the central bank's Federal Open Market Committee (FOMC).

A statement from the FOMC said the vote was unanimous.

In its post-meeting statement, the central bank repeated its promise to follow a "measured" pace, which markets have taken to mean a series of smaller, quarter-point rate increases rather than larger ones.

"With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," the statement said.

'No real surprises'

There was no huge change in the Dow Jones and Nasdaq following the announcement, although both moved upwards after earlier mixed trading.

Earlier, the major European markets had closed not much more than 1% down, having expected the Fed decision.

The fact the rise had been so widely trailed in advance meant markets had already factored in the expected rise.

"There were no real surprises, and the market reacted the way you would expect," said Rick Meckler, president of Libertyview Capital Management.

"I would expect to see a continued gradual rise in rates throughout the year. By year end, we might have another 50 to 75 basis points of tightening."

In London, John Butler of HSBC said: "The fact we're seeing rates rise shows they are more confident about the US economy, which should be seen as positive for the UK economy."

Consumer confidence

The FOMC committee said it would respond to changes in the US economy as needed.

If Alan Greenspan had put up a neon sign on top of the Fed, he couldn't have signalled more clearly that rates were about to go up

Over the past three-and-a-half years Mr Greenspan has cut rates steadily to offset the effects of the popping of the technology bubble in the late 1990s, the 11 September attacks, and the wars in Afghanistan and Iraq.

But all the latest evidence showed the world's biggest economy was growing at a "solid pace" and job market had improved, the FOMC statement said.

As well as rising consumer spending, and confidence, the US jobs market has been looking increasingly healthy recently.

Now the Fed is expected to move rates up in a number of small steps this year and in 2005.

"The only way the rise becomes quicker is if the economy grows more quickly and inflation picks up, but the most recent evidence points the other way," said Mr Meckler.

Some analysts say if payrolls, the unemployment rate and the consumer price index strengthen further, the committee may be tempted to switch to 50 basis point moves.

The FOMC committee is next due to meet on 10 August and 21 September.

The BBC's Stephen Evans
"The era of ultra-cheap money is now coming to an end"

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