Updated from 2:47 p.m. ESTThe Federal Reserve, convened for the first time under new Chairman Ben Bernanke, raised official interest rates again Tuesday and offered a view that 15 consecutive hikes are limiting growth to a pace that is "more sustainable." The Federal Open Market Committee raised its official fed funds target by a quarter-point to 4.75%, the highest level since April 2001. In an accompanying policy statement, the committee retained language stating that further tightening might be necessary, depending on the character of incoming economic data. "The committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the FOMC said in a reprise of previous language. "In any event, the committee will respond to changes in economic prospects as needed to foster these objectives." Stock and bonds sold off as traders braced for at least one more 25-basis-point tightening. The Dow Jones Industrial Average ended down 96 points at 11,155, while the S&P 500 shed 8 points to 1293 and the Nasdaq lost 11 points to 2304. The yield on the 10-year Treasury bond went from 4.75% to 4.77%. To view Aaron Task's video take on today's Fed news, please
In a departure from previous communiques, the FOMC played down the impact of recent price pressures in the economy, suggesting that members believe they are very close to an ideal or "neutral" monetary policy. "The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors," the FOMC wrote. "Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. "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," it wrote. The decision came in the first Fed meeting to be overseen by Bernanke, who succeeded Alan Greenspan as chairman on Jan. 31. Few expected a Bernanke-led Fed to make any major departures from the Greenspan blueprint, which has pressed a gradual war against inflation while seeking to preserve three years of economic expansion. The Fed next meets May 10 and then again June 28 and 29. Before Tuesday's announcement, fed funds futures were pricing in 75% odds of another 25-basis-point tightening through June. Beyond that, traders are divided on the likelihood of more Fed action, with many discerning from recent data a case that the bank should be finished. Others believe the Fed will go the extra mile to squelch price pressures. "History tells us that the Fed has always overshot its tightening goal -- central bankers like to know the cork is firmly implanted in the bottle so that the inflation genie doesn't sneak out," wrote Rich Yamarone at Argus Research. "The worst thing a central bank can do when fighting inflation is fall behind the curve. Therefore, we are fairly comfortable with our Street-high estimate," which calls for a fed funds rate of 5.5% this year. A flashpoint in the debate has been the state of the U.S. housing sector, which has been the economy's primary creator of wealth for six years. Last Friday, the Commerce Department said February new-home sales fell 10.5% from January, while inventories shot to their highest levels in 10 years. A day earlier, however, the National Association of Realtors reported brisk sales of pre-owned homes for February.
Tuesday's Fed statement made no reference to housing prices. The inflation picture has been similarly cloudy. One week ago, the government said its producer price index fell 1.4% in February, reflecting big downturns in the cost of food and energy. Stripping those out, however, the so-called core producer price index rose 0.3%. A week earlier, the consumer price index for February came in at a relatively tame up-0.1% on both the headline and core numbers. At the same time, commodity prices have resisted deflation, as evidenced by front-month crude, which rose 6% last week and currently sits at a five-week high. The consumer also remains buoyant, with the Conference Board's confidence index hitting a nearly four-year high of 107.2 in a report earlier Tuesday. Locating a "neutral" fed funds level is something of an obsession for Bernanke, a former Ivy League academic who has devoted much intellectual energy to issues of the Fed's communicative habits over his career. In a speech March 20, Bernanke pointed to the behavior of long-term interest rates as a key indicator on this front. Discussing the persistent refusal of long-term rates to move in unison with fed funds, Bernanke saw two possibilities. One, a worldwide "savings glut" is creating artificial downward pressure on long yields, suggesting the Fed needn't be overly worried about their implications. Two, the low yields signify optimism about the future of the economy, suggesting the Fed must continue its vigilance about inflation. "I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come," Bernanke said at the time. "In previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint. This time, both short- and long-term interest rates -- in nominal and real terms -- are relatively low by historical standards." The Fed's current rate-hike campaign began in June 2004, when rates sat at 1% -- their lowest level since the 1950s.