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Last Updated: Tuesday, 20 September 2005, 19:02 GMT 20:02 UK
Fed lifts interest rate to 3.75%
The US Federal Reserve has raised interest rates for an 11th consecutive month, despite concerns the economy will slow after Hurricane Katrina.

Borrowing costs rose a quarter of a percentage point to 3.75% from 3.5%.

Even though there are fears Katrina will hit consumer spending, the biggest driver of the economy, analysts see rates rising to between 4% and 4.5%.

The Fed added it would move steadily to counter soaring housing costs and the high price of crude oil and petrol.

"Higher energy and other costs have the potential to add to inflation pressures," it said in a statement.

"However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained."

'Set back'

Quarter-percentage-point rate increases are expected to keep a lid on price growth without slamming the brakes on the economy, analysts said.

Economic growth in the US this year is forecast at between 3.5% and 3%.

Federal Reserve chairman Alan Greenspan
It seems there was a fairly robust debate about the pros and cons of moving or not
Ian Morris, HSBC

Officials have estimated that Hurricane Katrina, which ripped through the Gulf coast and sent crude oil and petrol prices to record levels, could knock as much as half a percentage point off growth.

While any slowdown in expansion is a worry, analysts said the economy is showing signs of being robust enough to shake off the ill effects.

In its statement, the Fed said Katrina would be a short term setback, but did not see it as "persistent threat".

"The widespread devastation in the Gulf region, the associated dislocation of economic activity and the boost to energy prices imply that spending, production and employment will be set back in the near term," the bank said.

'Sticking to its guns'

Importantly the Fed kept key words unchanged in its statement, language the financial market has been using to determine the central bank's stance on future rate increases.

The Fed reiterated that borrowing costs were "accommodative", signalling there was room to make further changes, analysts said.

However, any increase in rates would come at "a pace that is likely to be measured", the Fed said.

Federal Reserve Chairman Alan Greenspan
The US economy is giving Mr Greenspan plenty to ponder
"The Fed is sticking to its guns," said Robert Walters, an economist at Quicken Loans in Michigan.

"The Fed still thinks short-term interest rates are low enough to be pushing the economy so they are continuing to remove monetary stimulus at a pace that is likely to be measured."

Borrowing costs have climbed from a 46-year low of 1% in June 2003.

However, the decision to raise rates was not unanimous, with Fed Governor Mark Olson calling for borrowing costs to be left unchanged.

"It seems there was a fairly robust debate about the pros and cons of moving or not," said Ian Morris of HSBC.

But they believe Katrina is a short-term disruption and "are likely to keep raising rates", he added.


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