The US Federal Reserve on Wednesday lifted its base rate a quarter percentage point to 5.0 percent, while leaving financial markets guessing about its next move.
WASHINGTON: The US Federal Reserve on Wednesday lifted its base rate a quarter percentage point to 5.0 percent, while leaving financial markets guessing about its next move.
The increase was the 16th consecutive increase in the federal funds rate implemented by the Federal Open Market Committee (FOMC), which made slight changes to its forward-looking statement.
The decision disappointed those expecting a clear signal that the central bank was near the end of its rate-hike cycle, or at least prepared to pause.
"The committee judges that some further policy firming may yet be needed to address inflation risks but emphasises that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information," the FOMC statement said, noting that the vote was unanimous.
"In any event, the committee will respond to changes in economic prospects as needed to support the attainment of its objectives."
The raise was widely expected by markets, but the future course for the Fed is unclear. Some analysts expect the central bank to pause to assess the impact of its rate hikes, while others argue rates need to go higher to contain inflation.
The Fed's statement, inserting the word "yet," in its future outlook, leaves considerable leeway for policymakers, indicating the next move will depend on how the incoming economic data fit in with the Fed's forecast for a moderation in growth with relatively contained inflation.
"It's a little bit more hawkish than expected," said Barry Hyman, an equity market strategist at Ehrenkrantz King Nussbaum. "They are showing themselves to be inflation fighters."
"The Fed is laying the groundwork for a pause at some point, but there is no rush," said Avery Shenfeld, an economist at CIBC World Markets.
"I think it satisfies some 'doves' on the Fed that they tell the markets they are actively considering a pause, while keeping the door open for hiking even as early as the next meeting."
Shenfeld said he expects "an extended pause at 5.0 percent," but argued that the Fed "won't let the market know that until the day they do it."
"They don't want the bond market to rally and thereby lower mortgage rates and undo the effect of the tightening," Shenfeld added.
"They're trying to squeeze the economy a bit more and if they give the all-clear sign they would give a bit of stimulus to the housing market."
Wells Fargo Bank senior economist Eugenio Aleman said the Fed is looking ahead to keep inflationary pressures from building.
"They are opening the umbrella before it rains; basically they have to take a stand regarding future pressure on prices because monetary policy works with a lag of six months to a year," he said.
Aleman said the reworked statemement suggests the Fed is keeping its options open. "They are saying, 'we might wait a little bit'" before raising rates, "or 'we might continue to increase rates'. I think they are very close to neutrality but they want to be sure."
The economist said he expects the Fed to lift rates to 5.25 percent "if not in June at the next meeting." The Fed has hiked rates at every meeting since June 2004, bringing the fed funds rate from a four-decade low of 1.0 percent to 5.0 percent. Ever since August 2003, the FOMC statement has included language that provided strong clues about the committee's next move.
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