Federal Reserve boosted Americans' borrowing costs for the 16th
time in a row on Wednesday, the highest level in five years but
suggested what happens next will be much less predictable.
Chairman Ben Bernanke and his Fed colleagues left their options
wide open to order yet another increase or to take a break in their
two-year rate-raising campaign.
Decisions on interest rates will hinge more heavily on what
upcoming barometers say about economic activity and inflation, the
Fed policymakers indicated.
If surging energy prices should spark broader inflation, the Fed
could opt to bump up rates again. If the economy should show signs
of slowing more than anticipated, a pause in rate raising could be
in store.
To keep the economy and inflation on an even keel, the Fed
unanimously decided on Wednesday to increase its federal funds rate
by one-quarter percentage point to 5 percent. It marked the 16th
increase of that size since the Fed began to tighten credit in June
2004.
The funds rate, the interest that banks charge each other on
overnight loans, affects a variety of other interest rates charged
to consumers and businesses and thus is the Fed's primary tool for
influencing economic activity.
In response, commercial banks raised their prime lending rate
for certain credit cards, home equity lines of credit and other
loans by a corresponding amount, to 8 percent.
The actions lifted both the funds rate and the prime rate to
their highest points in just over five years.
On Wall Street, the Dow Jones industrials gained 2.88 points,
while other stock indicators lost ground.
Fed policymakers offered a largely positive assessment of the
economic climate, although they continued to express concern about
the potential for inflation to flare up.
Further moves "may yet be needed to address inflation risks,"
they said. Any such action, they added, "will depend importantly on
the evolution of the economic outlook as implied by incoming
information."
Economists said this language, more detailed than a previous
policy statement issued on March 28 gave the Fed more flexibility
in terms of future interest-rate decisions.
If the economy doesn't slow to a more sustainable pace as the
Federal Reserve expects and high energy prices start feeding into
the prices of lots of other goods and service, then the Fed could
opt to boost rates at its next meeting on June 28-29 or a some
other point.
However, if economic growth does slow, something that could
reduce inflation pressures, then the Fed might pause in its rate
raising at the June meeting or perhaps later this summer.
Many economists believe the Fed will take a break in its
rate-raising campaign this year although they have mixed opinions
on when that will happen. Some believe Wednesday's increase will be
the last for a while. Others predict the funds rate will rise to
5.25 percent in June and then the Fed will move to the sidelines. A
few believe the rate will rise to 5.50 percent before a pause.
"We are now in much more uncertain territory. Monetary policy
will become a lot less predictable and more focused on data," said
Lynn Reaser, chief economist at Bank of America's Investment
Strategies Group.
The economy in the first three months of this year grew at a
brisk 4.8 percent pace, the fastest in 2 1/2 years. That is
expected to slow to about 3 percent in the current April-to-June
quarter, still a healthy pace.
One challenge facing the Fed is figuring out whether high energy
prices will feed inflation, slow overall economic activity or
perhaps lead to both scenarios. Another challenge is gauging the
extent to which the housing market, which racked up record high
sales five years in a row, will slow this year. A slowdown in the
housing market is likely to crimp consumer spending and thus
overall economic activity.
So far, the run-up in energy prices and other commodities has
had only a modest effect on the prices of goods and services other
than food and energy, the Fed said. Still, "elevated prices of
energy and other commodities have the potential to add to inflation
pressures," the Fed added.
Oil prices hit a record high of US$75.17 a barrel in late April;
they are hovering above US$72 a barrel currently. Gasoline prices
have marched higher and have topped US$3 a gallon in some
areas.
Bernanke took over as chairman on Feb. 1. Of the 16 rate
increases, Bernanke's Fed ordered two and his predecessor, Alan
Greenspan, 14. Before the increases, the funds rate had been sliced
to a 46-year low of 1 percent to help the economy recover from the
bursting of the stock market bubble, a recession and terror
attacks.
(Chinadaily.com via agencies May 11, 2006)
