US Fed increases rates to 3.25%

The US Federal Reserve has maintained its "measured" pace of interest rate rises, raising the cost of borrowing by 25 basis points to 3.25%.

It was the ninth monthly rise in a row by the Fed's Open Market Committee.

Analysts had widely expected the move as the Fed tries to maintain economic growth but keep a lid on inflation.

The economy has fared well with 3.8% growth in the first three months of the year, but rising oil prices have stoked inflation fears.

The recent cycle of increases has seen US rates gradually rise from 50-year lows of 1% set in 2002.

Rates hopes

Rising US interest rates mean better returns for investors buying assets priced in dollars, thus pushing up the value of the US currency.

Although energy prices have risen further, the [economic] expansion remains firm and labour market conditions continue to improve gradually US Federal Reserve

Analysts had widely predicted the increase, but some voiced surprise that there was no hint from that the Fed was nearing the end of its current rate tightening cycle.

"It seems as though the Fed was suggesting that inflation pressures are very short term. That could be a hint that everything's under control right now," John Hughes, managing director of Epiphany Equity Research said.

Jeffrey N Kleintop, chief investment strategist at PNC advisors added: "Investors wanted to see that the Fed was going to say something that they were close to being finished."

The Fed's statement that accompanied its decision said that even with the rise in energy prices the economy has continued to grow at a respectable pace.

Walking a tightrope

"Although energy prices have risen further, the expansion remains firm and labour market conditions continue to improve gradually," it said.

It added that pressures on inflation "have stayed elevated" - acknowledging crude's recent rise to above the $60 a barrel level - but also reiterated its belief that "longer-term inflation expectations remain well contained".

Data released ahead of the decision revealed a fall of 6,000 in unemployment claims last week - the second weekly fall in a row - could be a signal that the economy remains healthy.

Meanwhile personal income growth slowed sharply - rising just 0.2% in May, compared with a 0.6% rise in April.

Alan Greenspan is juggling conflicting data

But, at the same time, consumer spending was unchanged in May after a rise of 0.6% in April. Experts attributed the slowdown to unusually cold weather which kept people away from the shops.

Among the other factors affecting the Fed's decision were fears in some quarters of a housing bubble.

Rock-bottom interest rates have helped drive a boom in house prices as homeowners remortgage their properties and - frequently - increase their borrowing to fund consumer spending or home improvements.

Some fear, however, that the rapid house price inflation could prove unsustainable.

Fed chairman Alan Greenspan has denied a national bubble but acknowledged that some locations may be at risk.