Credit costs may have to go higher still

WASHINGTON, Mar 29: In their first meeting under new chief Ben Bernanke, Federal Reserve officials lifted a key U.S. interest rate a 15th straight time and said credit costs may have to go higher still, given inflation risks.

The U.S. central bank's rate-setting Federal Open Market Committee voted unanimously to raise the benchmark federal funds rate target a quarter-percentage point to 4.75 per cent, the highest level since April 2001.

In a statement seen as having a hawkish tilt, Bernanke and his colleagues focused squarely on the possibility that price pressures could build and restated a caution that further rate rises may be necessary.

''As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation,'' the Fed said. ''Still, possible increases in resource utilisation, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.'' The FOMC also raised the more symbolic discount rate by a quarter-percentage point to 5.75 per cent.

The dollar rose and prices for U.S. stocks and government bonds fell on the hint of higher borrowing costs ahead.

Betting in futures markets shifted to show almost a 100 per cent chance of the Fed pushing the fed funds rate up to 5 per cent at its next meeting in May and perhaps even higher at subsequent meetings.

Some analysts had thought policy-makers would suggest that the string of rate hikes dating to June 30, 2004, might be near an end. Instead Bernanke, who took over from Alan Greenspan on Feb. 1, was seen as taking a clear stand against inflation.

''The message from Bernanke is simple -- that nothing has changed, that the Fed takes inflation just as seriously as under the 'maestro,''' said Chris Low, chief economist at FTN Financial in New York, referring to Bernanke's storied predecessor.

The federal funds rate governs overnight borrowing between banks, but it can sway a wide array of credit costs.

In the wake of the Fed's action, many banks raised the prime rate charged for loans to their best customers, which is often a baseline for credit cards and home loans.

WAITING FOR A SLOWDOWN

The U.S. economy has bounced back smartly after growing at a 1.6 per cent annual rate in the final three months of 2005, a sluggish performance the Fed pinned on ''temporary or special factors'' -- a possible reference to Hurricane Katrina.

Many forecasters think first-quarter growth will come in close to a rapid 5 per cent In the sole hint that policy-makers may view the rate cycle as being in the end stage, officials said in their statement they expect growth to come off its torrid pace.

''Economic growth has rebounded strongly in the current quarter, but appears likely to moderate to a more sustainable pace,'' the Fed said.

The language offered a bit more information on the outlook than statements had under Greenspan, and some analysts said it suggested a shift under Bernanke toward greater transparency.

In addition to highlighting the minimal impact lofty energy costs have had on underlying inflation, the Fed also said rising productivity was helping to mute wage-related price pressures and noted inflation was expected to remain low.

Still, with the unemployment rate at a historically low 4.8 per cent and unused industrial capacity dwindling, the central bank appeared unwilling to drop its inflation offensive.

''The committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance,'' the central bank said.

The central bank's favorite gauge of core inflation -- the core personal consumption expenditures price index that strips out volatile food and energy prices -- rose 1.8 per cent in the 12 months through January. Many officials have said they want to keep it under 2 per cent.

Michael Metz, chief investment strategist at Oppenheimer Holdings, said the statement underscored the uncertainty over when the rate-rise campaign would end, a delicate question on which Bernanke will have to forge consensus.

''They are using the 'may' approach to many variables -- the economy 'may' slow at the same time that inflation pressures 'may' intensify and therefore they 'may' have to raise rates again,'' he said.

A Reuters poll of 20 top Wall Street firms found 19 expected another rate rise at the Fed's next meeting on May 10, but only three saw a further move at the subsequent meeting in June.

REUTERS