The U.S. central bank Tuesday raised short-term interest rates a quarter point to their highest level in five years, 4.75 percent. The rate increase is intended to combat inflationary pressure by boosting the cost of credit.
It is the 15th consecutive quarter point rise in U.S. rates in the past 22 months. In their first meeting under new Federal Reserve Board chairman Ben Bernanke, monetary officials said further increases may be needed to keep inflation tame. Alan Blinder, a former central bank official who teaches at Princeton University, says the statement by the Reserve Board means that the process of monetary tightening is not yet over.
"I think they [the Fed] are certainly inviting the market to give the same interpretation, certainly one, maybe two more [quarter point rate increases]," he explained.
The statement said that higher energy and commodity prices so far appeared not to be having much impact on the economy. It said after slowing in the last quarter of 2005, economic growth has rebounded strongly. It expects growth to moderate to a more sustainable pace later in the year. Most forecasters say the United States will register growth of about three percent in 2006.
The Federal Reserve has been seeking to bring short-term interest rates to a more neutral level that promotes only moderate, sustainable economic expansion. During the economic slowdown in 2001 the Fed sought to stimulate growth by taking interest rates down to their lowest levels in 40 years. That monetary stimulus has now gradually been removed.
Higher interest rates translate into higher monthly payments on credit card debt and home mortgages whose interest rate varies with market conditions.
Separately Tuesday, consumer confidence in the United States rebounded sharply in March, rising to its highest level in four years.