Fed raises rates, may hike again

Washington, March 29 | Updated: Mar 30 2006, 05:35am hrs
In their first meeting under new chief Ben Bernanke, Federal Reserve officials lifted a key US interest rate a 15th straight time and said credit costs may have to go higher still, given inflation risks.

The US central banks rate-setting Federal Open Market Committee voted unanimously to raise the benchmark federal funds rate target a quarter-percentage point to 4.75%, the highest level since April 2001. In a statement seen as having a hawkish tilt, Bernanke and his colleagues focused squarely on the possibility that price pressures could build and restated a caution that further rate rises may be necessary. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, the Fed said. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The FOMC also raised the more symbolic discount rate by a quarter-percentage point to 5.75%. The dollar rose and prices for US stocks and government bonds fell on the hint of higher borrowing costs ahead. Betting in futures markets shifted to show almost a 100% chance of the Fed pushing the fed funds rate up to 5% at its next meeting in May and perhaps even higher at subsequent meetings. Some analysts had thought policy-makers would suggest that the string of rate hikes dating to June 30, 2004, might be near an end. Instead Bernanke, who took over from Alan Greenspan on February 1, was seen as taking a clear stand against inflation.

The message from Bernanke is simple that nothing has changed, that the Fed takes inflation just as seriously as under the maestro, said Chris Low, chief economist at FTN Financial in New York, referring to Bernankes storied predecessor.

The federal funds rate governs overnight borrowing between banks, but it can sway a wide array of credit costs. In the wake of the Feds action, many banks raised the prime rate charged for loans to their best customers, which is often a baseline for credit cards and home loans.