The US federal reserve, under its new chief Ben Bernanke, last night raised interest rates by a quarter point to 4.75 per cent, their highest level in nearly five years, as it sought to head off inflationary pressures and cool the economy.
The move is the 15th the US central bank has made since former chairman Alan Greenspan began raising rates from a 46-year low of 1 per cent in mid-2004.
Mr Bernanke, chairing his first meeting of the Federal Open Markets Committee since succeeding Mr Greenspan last month, had been widely expected to continue tightening monetary policy both to ensure inflation did not take off and to establish his inflation-fighting credentials on world financial markets, which hang on every utterance of the Fed chief.
The central bank's move seemed amply justified by data released earlier yesterday showing confidence among American consumers had jumped to its highest level in nearly four years in March. The rise was much bigger than Wall Street analysts had predicted and left them thinking the Fed would not stop tightening policy.
"This ... will boost hopes that activity in the first half of 2006 will remain robust. It will also increase talk of the Fed raising rates again in May, to 5 per cent," said James Knightley, economist at ING Financial Markets.
The US economy now seems to have shrugged off the blow it took from the hurricanes of last autumn and is growing robustly and starting to push up inflation.
The challenge for Mr Bernanke, however, is to apply the brakes without causing the world's biggest economy to stall.
Nariman Behravesh, chief economist at consultancy Global Insight, expected the Fed to raise rates another notch to 5 per cent at its next meeting on May 10th and said a further rise was possible over the summer, taking rates to 5.25 per cent, particularly as Mr Bernanke said recently there was little sign that the economy was slowing down.
"The only thing that might give the Fed pause would be a sharp correction in the housing market - a possible, but unlikely event," he said. )
