US Fed raises rates on Greenspans last day

Washington, Feb 1 | Updated: Feb 2 2006, 05:45am hrs
The Federal Reserve on Tuesday raised US interest rates a 14th straight time, suggesting a 19-month campaign of rate increases was near an end while saying higher borrowing costs may yet be needed. Meeting on the final day of Chairman Alan Greenspans 18-1/2 year tenure, the US central banks Federal Open Market Committee voted unanimously to lift the benchmark federal funds rate target a quarter-percentage point to 4.5%, the highest since May 2001.

The statement that outlined the Feds decision altered its guidance about the future course of rates, leaving the door open for Greenspans successor, Ben Bernanke, to either raise rates again or call a halt. The Senate on Tuesday confirmed Bernanke to take the Feds top job on Feb. 1. The Fed said further increases may be needed, a downshift from a December forecast that higher rates were likely. The long-standing pledge of measured rate rises also vanished from the statement.

Although recent economic data have been uneven, the expansion in economic activity appears solid, the Fed said in its statement. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained, the central bank added, while repeating a warning that higher energy prices and tight labor markets have the potential to add to inflation pressures.

The Feds policy-setting committee next meets March 28. They have presented Bernanke with a clean slate. They will come in in March and review the data from scratch, said Michael Jansen, currency strategist with National Australia Bank in New York.

Futures markets, and many analysts, are banking that that review will result in a 15th straight rate increase.

A Reuters poll of 21 of the top Wall Street bond firms that deal directly with the Fed in the markets found 17 of them forecasting another quarter-point move in March, with some predicting rates would go higher still.

A number of Fed officials have said they expect the economy to expand about 3.5% this year, roughly in line with estimates for the economys noninflationary speed limit.

The government said on Friday the US economy grew at a meager 1.1% annual pace in the final three months of last year, its weakest quarter in three years, but most analysts expect it to bounce back in the current quarter.

The bigger question is what happens later in the year. Some economists think the economy has a full head of steam that will require a more aggressive rate stance from the Fed to cool. Others expect a weakening in the U.S. housing market and warn consumer spending may falter as households find it hard to tap their home equity for cash.

Reuters