The US Federal Reserve did not fail analysts’ expectations raising the fed funds rate to 2.75% in a unanimous decision. The statement of the Fed, despite projections, keeps the word «measured», but contains indications as to the possibility of a more aggressive tightening in the future.

The Fed sees inflation as mounting in the months to come as policy-makers have made sure that the recovery has started to generate job growth.

The Fed said that "output evidently continues to grow at a solid pace despite the rise in energy prices, and labour market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices."

The allusion to the «picking up» inflation pressures was interpreted by the public as a sign of more hawkish language.

"I think the tone is slightly more hawkish and it could lead to slightly higher interest rates by year’s end," said economist David Jones, who wrote four books on the Greenspan Fed.

The probability of steeper rate hikes lent support to US currency. Several major banks, including JP Morgan, raised their prime rates 0.25% to 5.75%, meaning that credit is going to get more expensive for businesses as well as for customers. The move was also supported by Wells Fargo and Cleveland-based Key Corp. The hike also caused a drop in the bond and stock market. The yield on the benchmark 10-year Treasury bond jumped to 4.63% from 4.52% on Monday.

``We are close to a peak in yields, rather than in the middle of a bear market,’’ said Andre de Silva, deputy head of fixed- income strategy in London at HSBC Holdings Plc. ``The market is vulnerable in being too convinced yields are rising.’’

The Dow Jones industrial average lost 94.88 to close at 10,471.51.

The Fed has previously mentioned that it is heading for a «neutral» fed funds rate that will neither stimulate nor check in economic growth. Analysts project a 4% rate by the end of the year, and markets have already factored in this level. At the next Fed policy-setting meeting scheduled for June another quarter-point rate hike is expected, after which the monetary officials could move towards a more aggressive policy, following with half-point increases. Greenspan might make this move so as to be able to explain it in Congress later on as he presents the Fed’s semi-annual moneteary report to the congressmen in July. This is going to be Greenspan’s final presentation of a semi-annual report before the Fed long-term boss retires in January 2006.

Analysts earlier projected that the average mortgage rate will rise to 6.5% by the end of the year, up from today’s 5.75%, but now the most realistic estimate was pushed higher towards 7%.

The inflation remains at a historic low of 3.2%, although this is nevertheless a point higher than 18 months ago. Today March inflation figures for both the city and the nation are to be released.

Fed had a read on the strength of the economy prompted by the February job growth numbers: the US economy added 262,000 jobs last month.