US Fed opts to raise rates to 3%

The US Federal Reserve has decided to raise its benchmark interest rate by a quarter of a percentage point to 3%.

Analysts had widely predicted the rise as the Fed had been caught between a sudden economic slowdown and heightened worries about inflation.

The increase was the eighth time the Fed has tweaked rates since June.

The move was also consistent with its vow to move rates at a "measured pace", which experts have taken to mean small quarter percentage point increases.

The committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal US Federal Reserve rates statement High oil price hits US growth

The Fed's vote was widely expected with one analyst dubbing the decision "deja vu".

Jim Swanson of MFS Investment in Boston said only an economic "shocker" would push the Fed to raise rates by half of a percentage point.

'Wait and see'

And those expecting any hints on the direction of the economy were disappointed.

"I don't think the market can sniff out yet if this is a soft patch or something more. We will have to wait for more economic data in the next couple of weeks," Raymond James chief investment strategist Jefferey Saut said.

However the Fed, run by Alan Greenspan, is currently caught in the middle of conflicting economic data.

Mr Greenspan is juggling less than stellar US growth and inflation woes

"The committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal," it said in a statement accompanying its decision.

Noting the recent slowdown, the Fed added: "Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices."

However, it also said that rising prices meant "pressures on inflation have picked up in recent months and pricing power is more evident" before adding longer term inflation expectations remain "well contained".

Balancing act

Surging oil, gasoline and raw material costs seem to be taking their toll on the world's largest economy.

According to the Commerce Department, during the first three months of 2005 the US economy expanded at an annual rate of 3.1%, its slowest pace in two years.

Yet as growth slows consumers seem to be spending more, with the personal consumption index - a key guide to inflation used by the Fed - rising 0.5% in March.

Meanwhile, Commerce Department figures, released a couple of days after the report on economic growth, showed that consumer spending and personal incomes rose by more than expected in March.

Looking ahead many analysts expected the Fed to continue its balancing act, with many predicting more measured increases of 0.25%.

"They're moving ahead, they're going to get us back to neutral, which is probably 3.50% or 3.75%," Mr Swanson added.