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Gold9472
05-10-2006, 06:56 PM
Bernanke & Co. push benchmark rate higher
Many now expect Federal Reserve policy-makers to pause tightening cycle

http://www.msnbc.msn.com/id/12721288/

By Martin Wolk
Updated: 5:02 p.m. ET May 10, 2006

The Federal Reserve raised short-term interest rates for the 16th straight time Wednesday and suggested it is prepared to put the economy on cruise-control after nearly two years of tapping the brakes.

Fed Chairman Ben Bernanke and his colleagues raised the benchmark overnight lending rate to an even 5 percent, its highest level in five years, pushing up borrowing costs for businesses and consumers across a wide range of loan types. The Fed said policy-makers are still concerned about the potential for rising inflation and may need to raise rates yet again but stressed that "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."

That was enough for some analysts to declare that central bankers are likely to pause and take no action at the end of their next scheduled meeting June 29, possibly leaving rates unchanged into 2007.

"It's pretty subtle, (but) my read on this is that this is the pause that we're all waiting for," said Mark Vitner, senior economist at Wachovia Securities. "The Fed is still keeping an open mind as to whether they will pause at all, but right now as of May 10 they think the economy may cool off enough that they won't need to raise rates at the next meeting."

If the Fed does pause, it would mark the end of a remarkable streak that has seen the central bank push up rates in clockwork fashion — exactly a quarter-percentage point at every scheduled session since June 2004. The campaign, begun under former Chairman Alan Greenspan, has pushed up the benchmark rate four percentage points from a 46-year low of 1 percent.

"I really think they're done," said David Wyss, chief economist at Standard & Poor's. "I really think this economy is going to slow down in the second half of the year, and then they can go home."

The addition of the single word "yet" in the Fed's policy statement took on surprising significance as it suggested strongly that Bernanke and his colleagues would prefer to step to the sidelines unless rising inflation forces their hand, said Joel Naroff of Naroff Economic Advisors. The Fed said its Open Market 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..."

"That to me is saying that unless the data drives it, there is not going to be that firming," Naroff said. "It's just the inflation number that will drive them now."

And unless inflation turns "ugly," the Fed is likely to stay on hold into next year rather than appear indecisive through a series of stop-and-go moves, Naroff said.

Not everyone is buying the story that the Fed has hit the pause button, reflecting a bit of tension and uncertainty in financial markets over how to read Bernanke, who took over from the iconic Greenspan just three months ago and has brought a far more direct and plain-spoken style to his public remarks.

Ironically that is making him a bit hard to interpret for bond traders who were accustomed to translating Greenspan's trademark ramblings. It was hardly a coincidence that CNBC anchor Maria Bartiromo roiled stock markets last week by reporting Bernanke's off-the-cuff remark at a news industry banquet that his most recent comments on Capitol Hill had been misinterpreted. On Wednesday, broad stock market indicators ended with little change, suggesting the Fed statement was roughly in line with expectations.

Ethan Harris, chief U.S. economist at Lehman Bros., is among those who think financial markets are misinterpreting Bernanke. He expects the Fed to hike rates at least one more time and probably two based on strong economic data. He sees a 60 to 70 percent of a rate hike in June.

"Ben Bernanke is not Alan Greenspan — he is a very direct-spoken person," said Harris.

"When he said we may pause at some point, that wasn’t one of Greenspan's coded messages," he said. "In a sense the Fed is telling the markets, 'Don’t listen to what we're telling you, watch the economy because the economy will tell us what to do next. We can't pause if we see the still-strong economy and little hints of inflation.' It just wouldn’t be prudent to be sitting around while inflation risks are still rising."

Although the economy grew at a rapid 4.8 percent rate in the first quarter, its fastest pace in two and a half years, most forecasters expect that to slow to a more sustainable rate between 3 and 4 percent in coming quarters. Last week the government reported that the economy added only 138,000 jobs in April, far fewer than expected, and Vitner said he expected May retail sales, due Thursday, to be weak as well.

Wyss said he expected an extended economic slowdown after five years of steady growth, much like the pause seen in the mid-1990s before the economy reaccelerated. He said signs of the slowdown are likely to outweigh Fed concerns over inflation, which generally is a lagging indicator reflecting earlier economic expansion.

"Further tightening is more likely than any more loosening," said Wyss, but he expects neither. "I think they're done but I'm not sure of it, and they're not sure of it."

Major commercial banks followed the Fed's action Wednesday by boosting their prime rate, which establishes many loan rates including home equity and business credit lines, another quarter-point to 8 percent, compared with 4 percent less than two years ago.

Long-term rates, set by financial markets, have risen steadily over the past year, reflecting the prevailing view of strong economic growth pushing inflation higher. Fixed-rate 30-year mortgages, for example, are now well over 6.5 percent, compared with 5.5 percent a year ago.

Full text of Fed statement
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

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 percent. 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.

babybluepuppet
05-10-2006, 07:28 PM
i dont care, I HATE BUSH!!!

Gold9472
05-10-2006, 08:05 PM
i dont care, I HATE BUSH!!!

Hello.