US interest rate rises 0.25%

The Federal Reserve boosted a key short-term interest rate by 0.25% today, its first increase in four years, in an attempt to keep the US economy and inflation on an even keel.

Fed chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest rate policy in the United States – increased the federal funds rate to 1.25%.

The funds rate, the Fed’s primary tool for influencing economic activity, had been at 1%, a 46-year low, for a year.

As a result of the Fed’s decision to push up the funds rate, commercial banks’ were expected to increase by a corresponding amount their prime lending rate for many short-term consumer and business loans.

The prime rate, which has been at 4%, the lowest level in more than four decades for a year, is expected to rise to 4.25%.

The economy has been a hot topic in the presidential campaign with President George

Bush insisting things are rebounding and Senator John Kerry talking about a squeeze on the middle class.

Analysts said voters will likely see little impact on the economy between now and November from the Fed’s action.

Fed policy-makers, wrapping up a two-day meeting, also held to the view that they could gradually raise rates to head off inflation.

The Fed said it believes any rate increases can be “at a pace that is likely to be measured.”

The Fed made clear, however, if will take more aggressive action if needed. This restated a position that Greenspan had articulated earlier.

“The committee will respond to changes in economic prospects as needed to fulfil its obligation to maintain price stability,” the Fed policy-makers said.

Their latest assessment of the state of the economy was upbeat. The Fed said the economy is expanding at a solid pace and labour markets are improving.

On the inflation front, the Fed said that “although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.”