MercoPress. South Atlantic News Agency

US basic rate at highest level in 16 years, 5%

United States Federal Reserve Open Market Committee decided Wednesday to raise its target for the federal funds rate by 25 basis points to 5%, its highest level in more than five years and in line with market expectations.

The funds rate, the interest that banks charge each other, stood at a 46-year low of 1% when the Federal Reserve began raising rates in June 2004 to keep inflation under control.

However the US Central Bank policy-makers indicated they may take at least a brief pause in raising rates, since 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 car loans. Commercial banks were expected to quickly match the Fed action by boosting the prime lending rate to a five-year high of 8%.

The FOMC release said that "(US) economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices".

"As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. 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".

"The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives".

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6%. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco

Federal Reserve chairman Ben Bernanke had raised expectations that the central bank was preparing for a hikes 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 February 1, said a pause would give the central bank time to assess the impact its long string of rate increases was having on the economy.

The US economy expanded at an annual rate of 4.8% during the first quarter of this year, spurred by strong consumer demand following a 1.7% growth in the last quarter of 2005.

The International Monetary Fund has forecasted that the US economy would expand an estimated 3.4% this year.