US interest rates have been increased for the fourth time since June, with the Federal Reserve board announcing a 0.25 of a percentage point rise yesterday evening. The move was widely expected, but a statement accompanying the increase led market analysts to speculate that another rise may be on the way in the weeks ahead.
The increase followed a day when the US dollar had hit a record low against the euro, a trend which poses a threat to Irish exporters to that market. A strong euro also threatens euro zone growth, but there is no sign yet of any move by international central banks to try to slow the dollar's fall.
The Federal Open Market Committee - the Fed's key decision-making board - announced that it was increasing its key funds rate from 1.75 per cent to 2 per cent. It was the fourth increase since June, when the Fed started to lift rates from their historical lows of 1 per cent.
The latest increase had been expected, but there had been speculation that the Fed would pause for a while before pushing up rates again. This view was being questioned after last Friday's US jobs figures showed a strong 337,000 increase for October and last night's Fed statement gave no indication of a prolonged pause before rates rise again.
The stance of monetary policy remains "accomodative", the Fed statement says, indicating that it believes rates are still low enough to spur growth. Crucially, the statement said that "the committee believe that policy accommodation can be removed at a pace that is likely to be measured." This was taken by the markets as a signal that the pattern of gradual 0.25 of a point increases would continue, with another rise possible on December 14th.
The Fed funds rate, the overnight lending rate between banks, is still low by historical standards. Provided growth continues US rates are expected to continue rising into 2005.
Normally higher US rates would provide some support for the dollar. However the euro hit a record high of just over $1.30 yesterday . While it did get some support after figures showed that the US trade deficit narrowed to $51.6 billion in September from $53.5 billion the previous month, the euro was still quoted around $1.29 in late trading.
Last night, Italian economy minister Mr Domenico Siniscalco was forced to clarify earlier comments when he referred to "co-ordinated intervention of the European central banks." He said later that this did not refer to actual monetary intervention in the markets.
Earlier this week the ECB governor, Mr Jean-Claude Trichet, said that the recent dollar moves were "brutal."
