Federal Reserve Lifts
Funds Rate to 4.75%

At his first Fed policy meeting as chairman, Ben Bernanke picked up where predecessor Alan Greenspan left off: with another boost in interest rates and a hint of more to come.

The Fed raised its target for the federal-funds rate, charged on overnight loans between banks, to 4.75% from 4.5%. In a statement released after the two-day meeting ended Tuesday, the Fed said: "Some further policy firming may be needed to keep" the risks to both growth and inflation "roughly in balance," identical to language in the statement released after Mr. Greenspan's last meeting, on Jan. 31.

Bond and stock prices declined on the announcement, reflecting investors' increased certainty that more rate increases lie ahead.

It was the Fed's 15th consecutive quarter-point rate increase since it began to raise rates from a then-46 year low of 1% in June, 2004.

Mr. Bernanke was sworn in as chairman Feb. 1 and Tuesday was the first meeting of the policy-setting Federal Open Market Committee that he chaired. In his confirmation hearings he pledged "continuity" with Mr. Greenspan's policies, and the similarity of the FOMC's actions and words to those on Jan. 31 may have in part reflected that priority.

"Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace," the statement said in its most notable difference from Jan. 31. The inclusion of the Fed's view of where growth is going may reflect Mr. Bernanke's desire to more clearly demonstrate how the forecast is influencing monetary policy.

While energy prices could boost underlying inflation, so far they have not, aided by brisk productivity growth, the statement said. "Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures," similar to the Jan. 31 statement.

Mr. Bernanke has committed to making the Fed's actions and thinking more transparent, a trend that began in the early 1990s under Mr. Greenspan. The FOMC likely spent some its meeting discussing such proposals, which could include longer statements, revamping or ditching the "balance of risks" included in the statement, and releasing more frequent economic forecasts. Minutes to the meeting, to be released on April 18, may shed light on how the FOMC may alter its procedures.

The decision by the FOMC's 11 voting members was unanimous. Federal Reserve Board Vice Chairman Roger Ferguson, who is stepping down soon, did not attend his last meeting. It is customary for departing FOMC members to skip their last meeting.

Eleven of the Fed's 12 regional reserve banks voted for the accompanying increase in the little-used discount rate to 5.75% from 5.5%. The discount rate is charged on short-term Fed loans to commercial banks. The only bank not to request a quarter point increase was the Kansas City Fed.

Futures markets now put high odds that the Fed will raise its rate one more time, to 5%, at its May 10 meeting, then stop.

In recent months Fed officials have said they are less committed to raising rates further. Officials now acknowledge the rate is around "neutral", that is neither so low that it is stimulating growth or so high that it is hold growth back. They have emphasized that future actions will be geared to how economic growth and inflation alter the outlook.

On that front, the economic data presents no compelling argument for either higher or lower rates. The economy is growing about 4%, at an annual rate, in the current quarter, according to many forecasts, a solid rate, and the unemployment rate, at 4.8%, suggest little slack in the job market.

But inflation, at 1.8% excluding food and energy by the Fed's preferred measure, has been stable for the last eight months, in the upper half of many officials' 1% to 2% comfort zone.

As a result, the Fed is now grappling with whether it should raise rates to counter the risk, rather than the fact, of higher inflation. "The current attitude of the Fed is that inflation remains a risk rather than a reality," said Ethan Harris, chief U.S. economist at Lehman Brothers. "I think you're going to see both … tightening capacity and some kind of pickup in inflation." As a result, he predicts the Fed will eventually lift its key rate to 5.5%.

Larry Kantor, co-head of research at Barclays Capital, said despite steady increases in the federal-funds rate, "the financial environment is still stimulative: high stock prices, relatively low yields. Credit growth is still strong, companies are cash rich, investors seem to have plenty of money to put to work." He predicted that even if the Fed paused soon it would have to resume raising rates shortly afterwards.

But Maury Harris, chief U.S. economist at UBS, said the Fed should stop raising rates now, arguing the economy is already slowing. He noted in February new home sales and capital goods orders, excluding aircraft and defense, dropped. He predicted growth will slow to 2.5% by the second half of this year. If the Fed raises rates further, it risks overshooting and making the slowdown worse.

However, he said inflation is low enough that it is unlikely any such overshooting would push the economy into recession.

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