Updated from 2:34 p.m. EDT
raised official interest rates by another quarter-point Wednesday and signaled it has yet to decide whether more monetary tightening is needed to keep inflation in check.
Fed funds, the main policy lever of the Federal Open Market Committee, went to 5% -- its 16th quarter-point increase in as many meetings. In an accompanying policy statement, the Fed left the door open for either another hike or a pause when it next meets in late June.
"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," it said. "In any event, the committee will respond to changes in economic prospects as needed to support the attainment of its objectives."
The remarks represented a moderately dovish revision to the previous FOMC statement, adding conditionality with the insertion of "yet" and the phrase "will depend importantly on the evolution of the economic outlook." Financial markets are likely to interpret the commentary as raising the possibility of a rate-hike pause next month -- though not guaranteeing one.
Predictably, that led to a debate among economists over over whether the Fed is more inclined to hike or pause on June 29.
Changes in the statement "indicate, we think, that a further hike on June 29 is unlikely unless the forward-looking data between now and then are very strong," said Ian Shepherdson, chief economist with High Frequency Economics. "We think this means the Fed's default position has shifted from an expectation of tightening unless the data are very weak, to one of not tightening unless the data are strong."
But, said Michael Sheldon, chief market strategist with Spencer Clarke, "What the Fed has said is that economic data hasn't shown a slowdown, so we can expect further rate hikes. As a result, investors will have to monitor the economic data between now and the June Fed meeting. The Fed did what it had to do by leaving the door open for future hikes."
The fed funds rate now sits at its highest level since April 2001. Policymakers began their current campaign of increases from a base of 1% on June 30, 2004, and they have steadily turned up the pressure as economic growth snapped back and signs of inflation crept in.
Wednesday's statement shows that the Fed remains relatively sanguine about inflation. The FOMC repeated its earlier assessment that economic growth is likely to moderate to a sustainable pace, that inflation is contained and that high energy and commodity prices have yet to seep into finished products.
"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 statement said.
Minutes from the Fed's late-March meeting showed that policymakers generally agree that interest rates are near a neutral level. The level of comfort with future tightening varies among members, however.
The March minutes said: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy. However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance."
Under Chairman Ben Bernanke, who took over from Alan Greenspan on Jan. 31, the Fed has vowed to take a "data-dependent" approach to rate policy. The market has generally interpreted that as meaning the Fed would base future moves on the behavior of core inflation, which is currently running at roughly 2% a year.
The data-based stance has recently undergone modification. On April 27, Bernanke told Congress that the Fed would consider pausing rate hikes to let incoming data catch up with economic reality. A report later suggested Bernanke believed the markets misconstrued his remarks as guaranteeing a pause.
More confusion was created by last Friday's employment report, which showed slightly anemic payroll growth of 138,000 jobs but an uptick in hourly payroll growth -- a key gauge of what the Fed considers capacity utilization in the economy. A separate report on wage growth released last Thursday was similarly troubling.
Meanwhile, while measures of core inflation have remained relatively subdued at about 2% a year, various Fed members have said they remained fixated on the U.S. housing market, where low interest rates led to massive price appreciation in the early part of the decade.
To view Aaron Task's video take on the Fed decision, click here
Commodities such as oil and gold have been another flash point. With front-month crude up 15% already this year, the Fed has been watching the pace at which producers try to pass along higher costs in the price of finished goods. To date, there's been scant evidence such markups have been durable.
At the same time, however, there's been little to suggest the Fed's actions have done much to restrain economic activity. Business spending is up, manufacturing is strong, unemployment is at a very low 4.7%, and corporate takeovers are rampant. Private equity companies, which rely on the good graces of bank lenders to do business, are expected to do more than $100 billion in acquisitions this year.
Another place where excess could be taking hold is the stock market. The
Dow Jones Industrial Average
began Wednesday just 83 points below its all-time high. Meanwhile, the
recently broke out of a two-year trading range of roughly 1150 to 1300, closing Friday at a five-year high of 1325.8.
Heading into Wednesday, financial futures were pricing in 100% odds the FOMC would raise rates to 5% today. Futures were predicting 38% odds of a June tightening, and 80% certainty that fed funds will reach 5.25% by August.
Pausing to assess the effectiveness of its actions is not unusual in the Fed's history. Its last tightening campaign ended in May 2000, with a pause until January 2001, when it began to ease. The Fed eased at each subsequent meeting through January 2002, when it paused and then eased again in November; then it paused and eased again in June 2003. After that, the Fed paused until it began its current string of hikes starting in June 2004.