Fed Ups Interest Rate; Stocks Tumble

New Fed Chair Ben Bernanke Sets Record Following Greenspan's Formula

(CBS/AP)  Ben Bernanke, sticking with the Federal Reserve' playbook in his first meeting as chairman, boosted borrowing costs to a five-year high and hinted that an additional interest rate increase could be in store.

Wrapping up a two-day meeting Tuesday, Bernanke and his Fed colleagues struck a mostly positive tone, saying the economy "rebounded strongly" in the January-to-March quarter from an end-of-year lull. But Fed policymakers raised concerns about the potential for inflation to flare up.

On Wall Street, stocks tumbled as investors expressed disappointment that more rate increases could be in the offing. The Dow Jones industrials lost 95.57 points to close at 11,154.54.

In a unanimous decision, the Fed raised its key interest rate — the federal funds rate — by one-quarter of percentage point, to 4.75 percent. This rate, which is the interest that banks charge each other on overnight loans, affects other rates charged to consumers and businesses.

Fed officials, who were holding their first interest rate meeting under Bernanke, left the door open for further rate increases although private economists believe only one or two more rate hikes are likely. That might be because in a statement released with the decision, officials suggest inflation may still pose such a threat down the road and more increases might be necessary, CBS Radio News correspondent Barry Bagnato reports.

The quarter-point rate hike had been widely expected. Bernanke has emphasized since being chosen by President Bush that he planned to continue Greenspan's approach toward setting interest rates. That approach was characterized by baby steps aimed at giving markets and investors plenty of time to adjust.

"Mr. Bernanke has chosen incrementalism over radical change in his first meeting," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a consulting firm.

But higher interest rates have begun to cool the red-hot housing market, CBS News correspondent Anthony Mason reports.

"We are beginning to see price reductions," California relator Bill Podley told Mason.

Commercial banks reacted by lifting their prime lending rate — for certain credit cards, home equity lines of credit and other loans — by a corresponding amount, to 7.75 percent

Both the prime rate and the funds rate are at their highest since the spring of 2001.

Bernanke presided over his first meeting of the Federal Open Market Committee, the group that sets interest rates, and continued the gradual rate-raising campaign set in motion by his predecessor, Alan Greenspan.

It was the 15th such increase since the Fed started tightening credit in June 2004.

Some economists and investors hoped Bernanke would have indicated that Tuesday's increase was the last; he did not.

"The committee judges that some further policy firming may be needed" to keep inflation and the economy on an even keel, policymakers said in a statement after their meeting.