Fed Lifts Rate to 5.25%, Further Move Depends on Data (Update7) June 29 (Bloomberg) -- The Federal Reserve raised its overnight lending rate between banks by a quarter-point to 5.25 percent and said further increases depend on future information about the prospects for growth and inflation.
``The committee judges that some inflation risks remain,'' the Federal Open Market Committee said in a statement after a two-day meeting in Washington. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.''
Investors interpreted the language, coming after three weeks of tough talking by Fed officials on inflation, as suggesting the central bank is contemplating a breather after nudging rates higher at every meeting for two years.
``The Fed will leave its door open for further actions, but I think they are probably done,'' former Fed governor Robert Heller said in an interview after the decision.
The dollar fell by the most in four weeks against the yen and Treasury notes jumped. Stocks surged as traders scaled back bets on the likelihood the Fed will lift rates again in August, when policy makers next meet.
``Investors were expecting a more hawkish statement,'' said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago and a former Fed economist. Traders ``thought the language would be approximately the same as the May meeting.''
Focus on Testimony
The next milestone in gauging the Fed's intentions will come in three weeks, when Chairman Ben S. Bernanke delivers his semi-annual testimony to Congress. Between now and then, policy makers will get reports on employment, producer and consumer prices.
``Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year,'' today's statement said. ``Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained.''
Containing Inflation
The FOMC's unanimous decision lifted the overnight lending rate between banks by a 17th straight quarter point, from 5 percent, set at the last meeting on May 10.
``The fact that they indicated that inflation expectations are still contained is important,'' J. Alfred Broaddus, a former president of the Richmond Fed, said in an interview. ``It would tend to reduce the probability of further moves, but I think the key thing is it's going to be data-dependent.''
The streak of rate increases is the Fed's longest since the 1970s. The rate was 1 percent when policy makers started the current cycle in June 2004.
Traders placed about a 65 percent chance of an increase in August, based on the price of futures tied to the fed funds rate at the Chicago Board of Trade, down from 83 percent yesterday.
The Fed's move keeps its rate the highest among the Group of Seven industrialized countries. At least sixteen central banks, including those of Thailand, Turkey and Colombia, pushed borrowing costs higher this month.
Global Phenomenon
European Central Bank council members, including Yves Mersch and Nicholas Garganas, this week signaled the bank may step up the pace of rate increases to counter inflation. The ECB raised its benchmark rate to 2.75 percent on June 8, the third quarter point move in six months. Nine of 15 economists expect the Bank of Japan to lift its key overnight rate from near zero percent as early as July, according to a Bloomberg News survey.
U.S. consumer prices climbed at an annual rate of 5.2 percent in the first five months of the year, up from 3.6 percent at the same period in 2005. Minus food and energy, so- called core prices rose at an annual rate of 3.1 percent, from 2.4 percent increase in the first five months of last year.
Bernanke called the rise in inflation measures ``unwelcome developments'' in a June 5 speech and pledged that he ``will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.''
Fed officials are also trying to avoid a hard landing for the economy where high interest rates may restrain job growth and curtail spending. The average rate on a 30-year fixed mortgage jumped to 6.86 percent last week, the highest in more than four years, the Mortgage Bankers Association said yesterday.
Inflation-adjusted spending in March and April was the lowest since October last year. The prime lending rate, a benchmark for consumer loans, is likely to rise to 8.25 percent. The average price for unleaded gasoline is up about 30 percent from a year ago.
Fed officials used their two-day meeting this month to discuss their forecasts for growth, employment and inflation which Bernanke will present to Congress, starting with testimony before the Senate Banking Committee July 19.
