Fed hikes rates again

Central bank policy-makers raise key interest rate to 5.25 percent; leave door open.

By Grace Wong, CNNMoney.com staff writer
June 29 2006: 3:39 PM EDT


NEW YORK (CNNMoney.com) -- The Federal Reserve raised a key interest rate another quarter-percentage point Thursday - the 17th straight increase by the nation's central bank -but left Wall Street unsure of what it plans to do in the months ahead.

Fed policy-makers boosted their target for the federal funds rates to 5.25 percent, as had been widely expected, putting the overnight bank lending rate at its highest since January 2001.


In its accompanying statement, the Fed left the door open for more increases but said future moves would depend on economic numbers. (Read the statement)

"The extent and timing of any additional firming that may be needed to address these [inflation] risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information," the central bank said in its statement.

The Fed noted that economic growth is cooling. At the same time, it said some inflation risks remain - highlighting the twin challenges it faces.

The statement shows that the Fed under new chairman Ben Bernanke is focused on fighting inflation, but not at all costs, according to Michael Cheah, portfolio manager at AIG SunAmerica Asset Management.

"They clearly showed they are cognizant of fact that growth is moderating. They're very clearly saying that nothing is set and that future moves depend on the numbers," he said, referring to additional rate hikes.


A less aggressive Fed?
Interest rate futures on the Chicago Board of Trade indicated that traders are now betting there's a 72 percent chance the Fed will raise its rate target again in August, versus 88 percent before the announcement.

Stocks, which had rallied ahead of the announcement, rose further as investors cheered the fact that the Fed is taking heed of the cooling economy.

Some investors have been concerned that the Fed will cripple economic growth - and corporate profits - by raising interest rates too high.

Bonds, which also were higher before the statement, held steady, with the yield on the benchmark 10-year note at 5.21 percent.

But Keith Stock, a Fed watcher and president of MasterCard Advisors, the consulting arm of MasterCard International, said the central bank changed some of the language in its statement, which means more rate hikes could be in store.

In its May 10 statement, the Fed said more rate hikes "may yet be needed" but in its latest statement, policy-makers left out the word "yet" - which means they could be taking the possibility of a pause off the table, Stock said.

"We're definitely moving down the path of additional hikes," he said. "Eliminating that word raises the probability of additional increases."

The fed funds rate affects rates on auto loans, credit cards and corporate loans and is closely watched around the world.

The rate was at its lowest in more than 40 years when the Fed began raising rates two years ago in a bid to ward off inflation.