US rates upped on inflation fears

Fears of increasing inflationary pressures prompted the US central bank to raise rates at its 3 May meeting.

The Federal Open Market Committee (FOMC) opted to take action amid concern over rising prices, minutes of the meeting show.

But while there had been an "upcreep" in short term inflation it remained worried about slowing economic growth.

As a result, the FOMC opted to maintain its "measured pace" of rates rises, increasing rates by 0.25% to 3.0%.

The increase was the eighth time the Fed, led by Alan Greenspan, has raised rates since June.

Juggling act

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

"There are a few things you can see right off the bat: that they were still worried about an upside price risk but were beginning to worry about a downside risk to growth, and that's because of the flawed data in April," FTN Financial chief economist Chris Low said.

The main thing is that it suggests that the Fed is going to keep on raising rates Patrick Fearon, economist

Oil prices have been a particular headache, with rising fuel costs hitting growth.

According to data released last month, gross domestic product (GDP) grew at an annual rate of 3.1% in the first three months of the year - its slowest pace in two years - as consumers and businesses tightened their belts in the wake of rising energy prices.

However, US consumers have been more than keen to hit the shops and spend more with the personal consumption index - a key guide to inflation used by the Fed - rising 0.5% in March.

Figures from the Commerce Department also showed people were earning and spending more than expected during the same period.

"A discernable upcreep was apparent in survey measures of short- and, to a limited extent, long-term inflation expectations over recent months," the minutes said.

More rises 'ahead'

The conflicting figures have left the Fed effectively walking a tightrope with the committee agreeing that overall the risks were roughly equally balanced.

As a result, most analysts expect the Fed to stick to its current policy, and increase rates by just small quarter-percentage points.

"Even though there was some concern about economic weakness, every FOMC member thought that rates were too low, showing that they are really intent on tightening," Mr Low added.

Patrick Fearon, senior economist at AG Edwards and Sons, added: "The main thing is that it suggests that the Fed is going to keep on raising rates.

"They feel as if they have some distance to go so the most likely prospect is for at least a couple more rate hikes."