The US Federal Reserve decided Tuesday to raise the federal funds rate, which commercial banks charge each other on overnight loans, by a quarter percentage points to 1.75 percent.

This is the third action in a row this year the Fed takes to put inflation in check. The central bank ordered its first rate increase in four years in June and the second in August.
 
Since the beginning of this year, there have been signs that inflation pressures in the Untied States are increasing as the economy continues to grow following the brisk recovery in the second half of last year.

In the first eight months of this year, US consumer price index, the government's closely watched barometer of inflation, rose at a seasonally adjusted annual rate of 3.7 percent, compared with an increase of 1.9 percent for all of last year.

The "core" consumer price index, which excludes volatile energy and food prices, also increased at 2.2 percent annual rate during the months after advancing 1.1 percent in 2003. That is to say, consumer prices in the country are rising at a pace faster than last year, which means inflation pressures are accumulating.

Meanwhile, the personal consumer spending, another important economic indicator the Fed uses to track inflation pressures, has also kept a rising trend so far this year.

The rising of personal consumer spending, which accounts for two-thirds of the US Gross Domestic Product (GDP), reflects an increasing demand of the society. One of possible results of increasing demand is demand-pull inflation.

It is believed that the Fed is trying to act before inflation really hurts the US economy.
 
Tuesday's action came after the economic growth had slowed down in late spring and early summer. The US economy grew just by 2.8 percent in the second quarter, much lower than the 4.5 percent increase in the previous quarter.

Analysts, however, said it was the soaring energy prices, not the raising of federal funds rate by the Fed in June and in August, that resulted in the slowdown.

Government data showed that soaring energy prices had taken a toll on economic activity and aggravated the US trade deficit as the nation's foreign oil bill swelled.

As a result, the trade deficit in the second quarter shaved 1.37 percentage points off the GDP, compared with a 0.76 percentage point reduction in the first quarter.

Despite the slowdown, analysts said that the economy is still healthy enough to continue expansion.

In the second quarter, for example, businesses' nonresidential investment increased 12.1 percent, up from the 4.2 percent rise in the first quarter, indicating that businesses are confident in the economic growth.

Productivity, which has been playing an important role in pushing the economy to grow, rose by 4.6 percent in the second quarter compared with the corresponding period of last year.

In addition, the consumer credit increased at a strong seasonally adjusted annual rate of 6.4 percent in July following a weak growth rate of 2.6 percent in the previous month.

The strong growth of consumer credit was another sign that the US economy has resumed its strong recovery after hitting a soft patch.

As for the influence of the action on Tuesday, there is little possibility that it will cause powerful impact on the market, because it was measuring analysts' expectations and the market had been ready for the action.

And the federal funds rate of 1.75 percent is still at a historic low level and will certainly continue to stimulate the economic growth.

Besides, the US economy is relying less on low-level rates to grow now than before after one-year-long brisk recovery.

One major risk threatening the US economy, analysts say, is that crude oil prices in the international markets may surge again. So, they have revised their forecasts for this year's growth rate of the US economy, down from their previous estimates.

But they said that it is not necessarily a bad news for the economy to grow at a slower pace. A slower pace is more sustainable, they say.

Meanwhile, it is widely believed that what the Fed has been trying to do this year is to raise the federal funds rate to a "more normal level," ensuring the US economy to grow at a more sustainable rate while inflation to remain low.

(Xinhua News Agency September 22, 2004)