Fed Boosts Key Interest Rate

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AP / CBS
The Federal Reserve on Wednesday raised a key interest rate to the highest level in more than five years and signaled it may pause to assess the impact of its string of rate hikes. However, the Fed also left the door open for further rate increases.

The Fed boosted its target for the federal funds rate to 5 percent. The funds rate, the interest that banks charge each other, stood at a 46-year low of 1 percent when the central bank began raising rates in June 2004 to keep inflation under control.

In its statement announcing the decision, Fed policymakers indicated they may take at least a brief pause in pushing rates up further. It said the "extent and timing" of further rate increases would depend on future economic data.

Analysts said they read the new wording as a strong signal that the central bank will not raise rates at the next meeting on June 28-29. But analysts also said that if the economy does not slow as the Fed is forecasting, then the central bank will hike rates one or possibly two more times later this year.

"The most likely outlook is that they will pause at the June meeting, but if growth does not slow this summer, they will be tightening by August," said Mark Zandi, chief economist at Moody's Economy.com.

Wall Street, which had been hoping the Fed would state more plainly that it could be finished raising rates, expressed disappointment with the new statement. Stocks widened their losses after the midafternoon announcement.

The Fed's rate hikes have raised the borrowing costs for millions of Americans on everything from adjustable rate home mortgages to auto loans.

Commercial banks quickly followed the Fed announcement by raising their prime rate, the benchmark for many consumer and business loans, to a five-year high of 8 percent.

CBS News correspondent Dan Raviv reports the Fed's decision has an impact on something we see every day — "For Sale" signs, outside houses. There definitely are more signs than last year, because homes aren't selling as quickly. Part of the reason for homes lingering on the market longer is the Fed pushing up the cost of a mortgage to buy a new home, Raviv reports.

Fed Chairman Ben Bernanke had raised expectations that the central bank was getting ready to pause when he told Congress on April 27 that the central bank might take a break for "one or more meetings."

Bernanke, who succeeded the legendary Alan Greenspan as Fed chairman on Feb. 1, said a pause would give the central bank time to assess the impact that its long string of rate increases was having on the economy.

In the statement announcing Wednesday's rate increase, the Fed said some further hikes "may yet be needed." That marked a slight modification from the March statement when it said further rate increases "may be needed."

It added another phrase in the latest statement saying that "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."

Bernanke had created confusion about the exact meaning of his congressional remarks when he was quoted by CNBC as saying that financial markets had misread his congressional testimony.

That comment came after bond prices, always sensitive to inflation worries, had fallen on fears that Bernanke would not be as tough as Greenspan in fighting inflation.

Private economists are split over whether Wednesday's rate hike will be the last for awhile or whether the Fed may pause for one or two meetings and then raise rates another one or two times to make sure that a recent jump in energy prices does not create more widespread inflation problems.

In assessing the current state of the economy, the Fed's brief statement tracked the comments Bernanke had made to the Joint Economic Committee.

The statement said that while economic growth had been "quite strong so far this year," the central bank still expected growth would moderate to a more sustainable pace, "partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

The overall economy grew at a sizzling pace of 4.8 percent in the first three months of this year, the fastest spurt for the gross domestic product in 2½ years. But private forecasters believe growth has slowed in the current quarter, reflecting in part rising mortgage rates, which have dampened home sales.

On inflation, the Fed said the surge in energy prices so far had had "only a modest effect on core inflation" with inflation expectations remaining contained.

The statement noted a unanimous vote for the quarter-point increase in the funds rate.