Fed raises rates, leaves markets guessing on future
By Tim Ahmann
WASHINGTON (Reuters) – The Federal Reserve raised benchmark
U.S. interest rates a 17th straight time on Thursday and said
inflation risks remain even though slowing economic growth
should help ease price pressures.
As widely expected, the central bank’s policy-setting
Federal Open Market Committee voted unanimously to lift the
benchmark federal funds rate target a quarter-percentage point
to 5.25 percent, its highest level since March 2001.
In a statement announcing its action, the FOMC — meeting
for just the third time under new Fed Chairman Ben Bernanke —
held open the possibility of further rate rises in its now
two-year credit-tightening campaign.
Still, the Fed said there were some recent signs that
economic growth was moderating, partly because of the gradual
cooling of housing markets and higher interest rates.
“Although the moderation in the growth of aggregate demand
should help to limit inflation pressures over time, the
committee judges that some inflation risks remain,” it said.
“The extent and timing of any additional firming that may
be needed to address these risks will depend on the evolution
of the outlook for both inflation and economic growth, as
implied by incoming information,” the statement added.
U.S. stocks and government bond prices added to gains and
the dollar eased as financial markets saw the statement as not
offering a clear signal on whether or not the U.S. central bank
will keep pushing ahead with rate rises.
“There was not sufficient language in the statement to
suggest a hawkish position,” said Michael Woolfolk, senior
currency strategist at the Bank of New York. “They are squarely
The increase is the latest in a string of quarter-point
moves dating back to June 2004, when the central bank began
moving credit costs up from a 1958-matching low of 1 percent.
Economists had expected the Fed to extend the series after
a number of troubling core inflation readings and tough remarks
from officials, who were seen as trying to shore up their
But analysts are divided over how much further the Fed
Some think the higher price of credit the central bank has
already put in place will restrain economic growth enough to
wring inflation pressures out of the system.
Others have argued overnight rates might need to be pushed
up as high as 6 percent to ensure inflation does not gain a
The core U.S. consumer price index, which strips out
volatile food and energy prices, has risen a surprisingly steep
0.3 percent in each of the past three months, an acceleration
Bernanke has called “unwelcome.”
Lofty energy prices and a historically low unemployment
rate, which hit a 5-year low of 4.6 percent last month, have
exacerbated the central bank’s inflation concerns.
U.S. Commerce Secretary Carlos Gutierrez told Reuters on
Thursday the Fed had done a good job at keeping core inflation
tamped down given the sharp acceleration in energy prices.
“We’re not going to second-guess the Federal Reserve,” he
said. “They’ve got the tools. They’ve got the data, the people
and the skills.”
At the same time core inflation has picked up, employment
growth has slowed and the long-hot U.S. housing market has
started to come off the boil. While the economy shot ahead at a
5.6 percent annual rate in the first quarter, economists think
it has already throttled back to a more comfortable pace.
Against this mixed backdrop, Fed officials have said one of
their most important jobs is ensuring an inflationary
psychology does not take hold.
“The (policy-setting) committee must continue to resist any
tendency for increases in energy and commodity prices to become
permanently embedded in core inflation,” Bernanke said earlier