The Federal Reserve on Tuesday lifted United States borrowing costs for the 10th time running to guard against inflationary pressure and signalled it would stay on a tightening course.
As expected, the US central bank’s Federal open market committee (FOMC) said it was taking the headline Fed funds rate to 3,5%.
In a statement, the Fed reaffirmed that its monetary policy remains ”accommodative” to economic growth and that any future rate
hikes would be ”measured”.
Overall, the statement was virtually identical to the release issued after the FOMC’s last meeting in June, except for new language that noted higher spending by US consumers and businesses.
”Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labour market conditions continue to improve gradually,” the FOMC said.
”Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated,” it added.
”With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.”
The FOMC decision was no surprise to economists, who have taken note of warnings by veteran Fed chairperson Alan Greenspan of the potential inflationary impact of record-high oil prices and ”froth” in the red-hot property market.
Attention was focused on whether the key words ”accommodative” and ”measured” would be altered to signal more aggressive action to grind down inflationary pressure and put the brakes on the world’s biggest economy.
Earlier on Tuesday, the government reported that the productivity of US workers slowed in the second quarter to June to an annual rate of 2,2%, from a revised 3,2% in the first quarter.
Unit labour costs — a key measure of future inflation arising from worker compensation — increased 1,3% in the second quarter after rising 3,6% in the first. It was the slowest rise in a year.
”The result should lessen market concern about a [data] series that chairman Greenspan had focused on, negatively, in his mid-year monetary policy report,” Nomura chief economist David Resler said before the FOMC decision.
”The gain falls back into the range that prevailed before the spike in labour costs that had garnered Mr Greenspan’s attention,” he said.
The US economy slowed down in the quarter to June to a pace of 3,4% from 3,8% in the previous three months. Consumer price inflation was surprisingly flat in June.
But other indicators may have given the Fed food for thought.
Unemployment is at a four-year low of 5%, normally a level at which wage pressures start to build given the tight supply of workers.
Last Friday’s ”non-farms payroll” report showed that the US economy created a surprisingly large 207 000 jobs in July. Average hourly earnings posted the fastest gain in a year.
The news hit Wall Street as investors began fretting that the Fed could adopt more aggressive rate hikes than the incremental increases of 25 basis points it has been pursuing.
Opinion varies as to how far the Fed will take interest rates back up, after pulling them as low as 1% to kick-start the economy in the wake of a 2001 recession.
Some say it could stop soon, others predict Greenspan will not be happy until rates top 5% and inflation is ironed out of the system.
Morgan Stanley economists Richard Berner and David Greenlaw said growth should accelerate to 4,5% in the second half of 2005 and inflation ”gradually will move beyond the upper end of the Fed’s comfort zone”. – Sapa-AFP