Europe South Asia Asia Pacific Americas Middle East Africa BBC Homepage World Service Education

Front Page



UK Politics







Talking Point

In Depth

On Air

Low Graphics

Wednesday, November 17, 1999 Published at 14:50 GMT

Business: The Economy

US Fed raises rates

The US Federal Reserve Open Market Committee (FOMC) has voted to increase interest rates by 0.25% to 5.5%, adding to the likelihood that interest rates will continue to rise around the world.

The BBC's Angela Garvey: "This third rate rise came as little surprise"
US shares soared, ending the day at or near all-time highs, as the Fed added that it would adopt a neutral bias, with no more interest rises in the pipeline for the time being.

But the move means that interest rates on mortgages and company loans are likely to go up.

"I think raising rates should take a little bit of wind away from the back of the stock market, and may make things a little sloppier over next few weeks," said Harvey Hirschhorn of Stein Roe & Farnham.

[ image: Fed chairman Alan Greenspan: tough on inflation]
Fed chairman Alan Greenspan: tough on inflation
The FOMC has already raised rates twice this year - in June and August - and clearly believed that these were not enough to cool the still booming US economy.

The Fed said it took the action because the economic growth was still too strong, risking inflation.

"Although cost pressures appear generally contained, risks to sustainable growth persist.

Carl Weinberg: "They don't have to tighten anymore"
"Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential," it said in a statement accompanying the decision.

Managing to slow down the US economy without inducing a recession could be crucial for the future of the world economy.

Earlier, the Organisation for Economic Cooperation and Development said it expected US interest rates to reach 6.5% and for US growth to slow substantially over the next two years.

Last year the Fed cut rates three times to help prevent a global financial meltdown. Its latest move means that it has now reversed all those reductions.

Many analysts are convinced that this will be the last interest rate hike for some time.

"My feeling is that the Fed perhaps is finished hiking rates into the foreseeable future" said John Lonski of Moody's Investors Services.

Dream scenario

Meanwhile, the US economy continues to expand rapidly with little signs of inflationary pressure.

Industrial production rose by 0.7% in October, its strongest rate for eight months, rebounding from September's hurricane induced slowdown.

And data released last week showed that the productivity of US workers rose sharply in the third quarter of the year, at a rate of more than 4%, keeping growth in labour costs in check.

Rising productivity can help keep inflation in check as it allows firms to increase output without having to incur higher labour costs.

With productivity high, labour costs are rising very slowly, just 0.6% during the quarter, the lowest rate since a 0.5% rise in the fourth quarter of 1998.

However, the Fed is still worried that the shrinking number of available workers will eventually force up labour costs and inflation.

It warned that expansion could be jeopardised if growth continued to eclipse increases in both productivity and the pool of available workers.

Advanced options | Search tips

Back to top | BBC News Home | BBC Homepage | ©

The Economy Contents

Relevant Stories

16 Nov 99 | The Economy
World growth accelerates

15 Nov 99 | The Economy
US dream scenario continues

29 Oct 99 | The Economy
Greenspan issues growth warning

Internet Links

Federal Reserve

The BBC is not responsible for the content of external internet sites.

In this section

Inquiry into energy provider loyalty

Brown considers IMF job

Chinese imports boost US trade gap

No longer Liffe as we know it

The growing threat of internet fraud

House passes US budget

Online share dealing triples

Rate fears as sales soar

Brown's bulging war-chest

Oil reaches nine-year high

UK unemployment falls again

Trade talks deadlocked

US inflation still subdued

Insolvent firms to get breathing space

Bank considered bigger rate rise

UK pay rising 'too fast'

Utilities face tough regulation

CBI's new chief named

US stocks hit highs after rate rise

US Fed raises rates

UK inflation creeps up

Row over the national shopping basket

Military airspace to be cut

TUC warns against following US

World growth accelerates

Union merger put in doubt

Japan's tentative economic recovery

EU fraud costs millions

CBI choice 'could wreck industrial relations'

WTO hails China deal

US business eyes Chinese market

Red tape task force

Websites and widgets

Guru predicts web surge

Malaysia's economy: The Sinatra Principle

Shell secures Iranian oil deal

Irish boom draws the Welsh

China deal to boost economy

US dream scenario continues

Japan's billion dollar spending spree