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Thu, Sep 22, 2005 - Page 12 News List

US Fed lifts base rates to 3.75 percent

NEAR-TERM SETBACKS The devastation wrought by Hurricane Katrina will not pose a `persistent threat' to the US economy, the US Federal Reserve said


US Federal Reserve policymakers Tuesday lifted their base rate by a quarter-point to 3.75 percent, signaling confidence in the US economy despite an uncertain impact from Hurricane Katrina.

It was the 11th consecutive rate hike by the central bank's Federal Open Market Committee, which devoted much of its statement to Katrina's impact.

"The widespread devastation in the Gulf region, the associated dislocation of economic activity and the boost to energy prices imply that spending, production and employment will be set back in the near term," the committee said.

"While these unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat."

Hong Kong's de facto central bank raised yesterday the basic rate at which local banks borrow money, by 25 basis points to 5.25 percent, following a quarter-point rise overnight in US rates.

The Monetary Authority's (HKMA) move was expected. Hong Kong's rates tend to move in lock-step with those in the US as the local currency is pegged to the greenback. Local banks tend to follow suit.

Some analysts said the Fed's move was a vote of confidence in the US economy's ability to weather the impact of Hurricane Katrina and the devastation of New Orleans, while others said the central bank may be running the risk of slowing the economy.

The vote however was not unanimous as at most prior Fed meetings. Board Governor Mark Olson dissented, voting to hold rates steady.

The Fed board voted to increase the largely symbolic discount rate by a quarter percentage point to 4.75 percent on the request of seven of the 12 Fed banks.

The Fed actions prompted commercial banks to make a corresponding rise in their prime rate for major businesses to 6.75 percent from 6.50 percent and is likely to lead to similar increases in other rates.

Markets expect one or two more rate hikes from the Fed before the end of the year, but the FOMC gave no indication that it is done. The committee said current rates remain "accommodative" and suggested again that rates could be raised at a "measured" pace.

The decision indicates that the central bank "sees the economy as very resilient," said Barry Hyman, equity market strategist at Ehrenkrantz, King and Nussbaum.

The inclusion of the phrase "measured pace" in the accompanying policy statement reveals that the Fed continues to keep raising rates, he said. References in the statement to the recent devastation caused by Hurricane Katrina in the Gulf Coast reveal that the Fed "understands that the impact will be temporary," Hyman said.

But Gary Thayer, chief economist at AG Edwards who had predicted the Fed would pause at the current meeting, said central bank policymakers may be running a risk of slowing the economy too much.

"I don't disagree with their view on the economy in the long run," Thayer said. "But I think they're overlooking the near-term impact" of Katrina, which provided "a good excuse to hold policy steady."

"Today's action will cement their credibility as an inflation fighter, but it comes at the risk of slowing the economy," Thayer said.

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