The US Federal Reserve on Tuesday raised interest rates by a quarter point to 2.25 per cent and signalled that there had been no change in its assessment of economic conditions.
The Federal Open Market Committee left the wording of its policy statement virtually unchanged from its last meeting: monetary policy remained “accommodative”, output was growing at a moderate pace in spite of the rise in energy prices, and inflation and long-term inflation expectations remained unchanged.
The central bank said it would continue to raise rates “at a pace that is likely to be measured” and gave no indication of an early end to quarter-point increases. Bond and stock markets rose slightly and the dollar edged lower after the announcement, which was widely expected.
The FOMC has raised rates by a quarter point at each of its last five meetings. On Tuesday it gave no signal that it might either need to move to more aggressive rate increases or pause in its tightening campaign.
Tuesday's rate increase came amid new data showing that high oil prices and retail stockpiling before the holiday season had pushed the US trade deficit to a record in October. The trade gap widened to $55.46bn from $50.9bn the previous month, the Commerce Department said above economists' expectations. The trade gap and the low savings rate are seen within the Fed as factors likely to be drags on growth.
International concern over the US fiscal and current account deficits has contributed to the recent decline in the dollar, though there is no sign of alarm, judging by the low level of long-term interest rates.
The yield on the 10-year Treasury note, at just over 4.1 per cent, was little changed after the rate increase. In June, before the FOMC started raising rates, it stood at almost 4.9 per cent.
The White House is hosting an economic summit with business leaders and economists on Wednesday and Thursday to discuss President George W. Bush's plans, including Social Security and tax reform. Industry has told the administration that reducing the fiscal deficit should be its priority.
The FOMC said the balance off risks to the inflation and growth outlooks are both rougly equal. However, a federal funds rate of 2.25 per cent rate is still seen as accommodative, or too low to be consistent with medium-term price stability. Policymakers have indicated they intend to continue raising rates to a neutral level as long as there is no evidence this risks knocking the expansion off track and that the pace of increases will be dictated by the incoming data.
The FOMC also announced that it would in future release the minutes of its meetings three weeks after it meets. The minutes of Tuesday's meeting will be released on January 4. The change in policy, to increase transparency, follows discussions within the Fed over the past year on how to improve its communications with the markets.
In one change in its policy statement on Tuesday, the committee toned down its assessment of the labour market, saying “conditions continue to improve gradually” a slightly less definitive view than in November following last month's weaker employment report. Employment growth has averaged 185,000 a month this year, fast enough to convince policymakers employment growth has turned the corner.
The committee also acknowledged in passing that oil prices have fallen recently, a development which, if it continues, will help growth next year.
