Washington, DC, June 29, 2006--The Federal Reserve raised interest rates Thursday at its 17 straight meeting. The move, which was expected, brings the Fed funds rate from a four-decade low of 1% to 5.25%, its highest level since March 2001.
The statement from the Federal Open Market Committee was overhauled from earlier statements. It suggested that some "inflation risks remain," even as economic growth cools.
"Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risks remain," the statement said.
"Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of interest rates and energy prices," the committee said.
The rate hike was widely expected after hawkish commentary over the past six weeks from Fed officials, especially Fed chief Ben Bernanke.
The vote to raise rates was unanimous.
Many economists and the market predict the Fed could be done after one more move to 5.50% in August. But a growing number of Fed watchers have been raising their expectations of the year-end Fed funds rate to 6.0%.
Fed officials have said their next moves are "data-dependent" or based on how the incoming economic data fit in with the Fed's forecast of moderate growth along with relatively contained inflation. Read our complete Fed coverage.
The committee said any future rate hikes would demand on the evolution of the outlook for both inflation and economic growth.
After the economy expanded at a 5.6% rate in the first quarter, economists expect gross domestic product growth to slow abruptly to a 2.9% pace in the April-June quarter.
The big question is what happens to the growth rate in the second half of the year. Currently, private-sector forecasters peg third-quarter growth at 2.9%, and the fourth-quarter at 2.8%.
While some economists fear the Fed may go too far and push the economy into a recession, others say the Fed has no choice but to raise rates because the strong economy continues to put upward pressure on prices.
Fed officials are clearly uncomfortable about inflation after the core consumer price index rose 0.3% in each of the past three months, a 3.8% annual rate. A different gauge of inflation preferred by the Fed--the core personal consumption expenditure price index--has risen 2.1% in the past year.
In a related move, the Fed raised its largely symbolic discount rate by a quarter percentage point to 6.25% on the request of 10 of 12 regional Federal Reserve banks
