Washington, DC, May 10, 2006--The Federal Reserve raised interest rates by a quarter percentage point to 5% on Wednesday and left the market in the dark about whether it would raise rates again.
After an unprecedented 16 straight rate hikes, the Fed's statement leaves open the possibility that the Federal Open Market would hold interest rates at 5% for quite a while. Or the Fed could decide further rate hikes are needed to cool the economy and to keep inflation in check.
Some economists expect the Fed funds rate to hit 5.5% by year-end before the Fed is finished. Others say the Fed is now done.
With a minor change to the wording in to recent announcements the Fed’s statement this week read, “The committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."
The statement indicates that the Fed's next move will depend on how the incoming economic data fit in with the Fed's forecast for a moderation in growth along with relatively contained inflation. The Fed is on guard for higher-than-expected inflation, but also for any sharp slowdown in spending due to high energy costs or a decline in housing values.
"Economic growth has been quite strong so far this year," the committee said. But growth is "likely to moderate to a more sustainable pace," reflecting a slowdown in housing and higher energy prices.
The committee said higher energy prices have had "only a modest effect on core inflation" so far. Inflation expectations "remain contained," the committee said. High productivity has kept labor costs in check.
Still the Fed warned that "possible increases in resource utilization" and higher commodity prices "have the potential to add to inflation pressures."
In one significant change, the statement eliminated any explicit statement of the balance of risks, but retained the committee's judgment about those risks in its commentary on growth and inflation.
The vote to raise rates was unanimous.
