Fed nudges rates to 2.25% as trade gap widens to record $55bn

Further increases in US interest rates likely

Ashley Seager and David Teather in New York
Wednesday December 15, 2004
The Guardian

America's central bank, the Federal Reserve, last night raised interest rates as new figures showed the country's trade deficit plunged to its worst on record.

The Fed's open market committee (FOMC) raised its federal funds rate as expected by 25 basis points to 2.25%.

The increase is a continued nudging up of interest rates after cutting them to the 45-year low of 1% as it tried to head off the effects of the terrorist attacks on the US economy.

The increase was the fifth over the past six months and the Fed signalled that further rate rises are on the way as the economy improves. "Output appears to be growing at a moderate pace, despite the earlier increase in energy prices, and labour market conditions continue to improve gradually," the committee said.

The Fed indicated it could afford to continue raising rates at a "measured" pace. "Inflation and longer-term inflation expectations remain well-contained," it said.

The dollar, which last week hit a record low against the euro, moved down again after the Fed's decision to trade at $1.3300 while the Dow Jones industrial average went higher, climbing 12 points to 10,650.

The US economy grew 3.7% on an annualised basis in the third quarter of the year and there are signs inflation is picking up. Figures released yesterday showed industrial output grew 0.3% last month, suggesting the economy has recovered from its summer soft patch.

Most economists expect the Fed to continue raising rates by a quarter point at its meetings next year, with the average forecast that rates will be up to 3.5% by the end of 2005, still below Britain's 4.75%.

"They still have a way to go," said Ken Kim, an economist at Stone & McCarthy Research Associates. "We're seeing evidence that inflation is moving higher. It's not a risk, it's actually happening," he said.

Data showed the US trade gap - the difference between imports and exports - widened to a record $55.5bn in October as high oil prices pushed imports to record levels.

The US trade and current account deficits are blamed for the drop in the dollar's value over the past two years, a fall that has accelerated since President Bush was re-elected.