The Federal Reserve on Wednesday (May 10) raised a key interest rate to the highest level in more than five years but signaled that it may pause to assess the impact of its string of rate hikes.
The Associated Press reported that the Fed boosted its target for the federal funds rate to 5%. The funds rate, the interest that banks charge each other, stood at a 46-year low of 1% when the central bank began raising rates in June 2004 to keep inflation under control.
In its statement announcing the decision, Fed policy-makers indicated they may take at least a brief pause in pushing rates up further. It said the “extent and timing” of further rate increases would depend on future economic data.
The Fed’s rate hikes have raised the borrowing costs for millions of Americans on everything from adjustable rate home mortgages to auto loans. Commercial banks were expected to quickly match the Fed action by boosting the prime lending rate to a five-year high of 8%.
Fed Chairman Ben Bernanke had raised expectations that the central bank was getting ready to pause when he said in congressional testimony on April 27 that the central bank might take a break for “one or more meetings.”
Bernanke, who succeeded the legendary Alan Greenspan as Fed chairman on Feb. 1, said a pause would give the central bank time to assess the impact that its long string of rate increases was having on the economy.
In the statement announcing Wednesday’s rate increase, the Fed said that some further rate hikes “may yet be needed.” That marked a slight modification from the March statement when it stated that further rate increases “may be needed.”
It added another phrase in the latest statement saying that “the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.”
Private economists are split over whether Wednesday’s rate hike will be the last for awhile or whether the Fed may pause for one or two meetings and then raise rates another one or two times to make sure that a recent jump in energy prices does not spill over into more widespread inflation problems.