US Fed raises rate to 5 per cent; non-committal on further hikes
11 May 2006
The US Federal Reserve raised short-term interest by another 25 basis points to 5 per cent per annum yesterday. This is the 16th straight rate hike by the Fed since mid-2004. The Fed rate is now at a 5-year high.
The rate hike was widely expected as the US economy recorded a 4.8 per cent growth during the first quarter of 2006 and is showing no clear signs of a slow down.
However, market expectations of any indication about a pause in rate hikes were belied. The statement issued by the Fed indicated that the central bank is yet to decide on the future rate policy and has left its options wide open.
"The committee judges that some further policy firming may yet be needed to address inflation risks but emphasises 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 Fed statement said.
The phrase 'may yet be needed' is seen as a move by the Fed to give itself more policy leeway if US economic growth remains robust in coming quarters and inflationary pressures increase.
The Fed remains concerned about inflation as the statement said, "Possible increases in resource utilisation, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures".
