Fed worries grow on US inflation

High fuel prices are causing policymakers concern

Inflation is a growing concern in the US economy and interest rates may have to rise to nullify the threat, the Federal Reserve has indicated.

Minutes from the Fed's monetary policy meeting in March - at which it raised rates by 0.25% to 2.75% - suggest more concern about inflationary pressures.

Fed policymakers, who voted unanimously for the rise, noted a requirement for a "tightening" of monetary policy.

However, they said they did not think "accelerated" rate rises were needed.

Analysts interpreted the comments as a signal that the Fed believed that the rate of economic growth was healthy and that substantial hikes in interest rates were not on the cards.

Measured pace

The deliberations of the Fed's Open Market Committee are closely scrutinised as a clear indicator of the future direction of interest rate policy and the general state of the US economy.

The committee - headed by Fed chairman Alan Greenspan - noted that many of its members believed that the "distribution of possible inflation outcomes was now tilted a little to the upside".

What the Fed is saying is that the economy is doing all right Bryan Piskorowski, Wachovia Securities

However, it stressed that it expected inflation to be contained and that any changes to interest rates would take place at a measured pace.

"Although the required amount of cumulative tightening may have increased, members noted that that an accelerated pace of policy tightening did not appear necessary at this time," it noted.

Policymakers have been concerned that the rising costs of fuel - with crude oil prices above $50 a barrel - will feed through into higher prices for consumer goods.

They have raised interest rates seven times since last June.

'Less hawkish'

Economic growth has remained relatively robust, GDP growing by a higher than expected 3.9% in the last quarter of 2004.

Analysts said that the Fed's remarks were more encouraging than had been expected.

"What the Fed is saying here is basically that the economy is doing all right and that we have got our eye on the ball," Bryan Piskorowski, an analyst with Wachovia Securities, told Associated Press.

"The market was going into this expecting the worst and now that we see a little less hawkish demenaour with this announcement, the market's got some wriggle room."