Bernanke: Serious note

Washington, March 29 (Reuters): In their first meeting under new chief Ben Bernanke, Federal Reserve officials lifted a key US interest rate a 15th straight time and said credit costs may still go up, given the inflation risks.

The US 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 since April 2001.

In a statement seemingly 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.

“The run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation so far,” 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 US 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 February 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.

The US 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; some analysts said it suggested a shift under Bernanke toward greater transparency.