After two years and 17 consecutive interest rate increases, the Federal Reserve is hinting that it might finally be finished raising rates to fight inflation.
The central bank announced on Thursday that it was boosting rates to their highest level in more than five years, but provided several hints that those rate increases could be drawing to a close. Stocks posted a huge relief rally, driving the Dow Jones industrial average up by 217 points.
For one thing, the Fed modified a phrase it had been using in some variation since December that some future rates hikes may be needed to combat inflation.
PHOTO: AFP
Instead, the central bank said the "extent and timing of any additional firming that may be needed" will depend on incoming data.
Also, the central bank noted that the economy was "moderating from its strong pace earlier this year."
Those changes in the Fed's statement were all that Wall Street needed to stage a huge rebound after stock prices took a big hit early last month.
At that time, worries about inflation pressures from Federal Reserve Chairman Ben Bernanke sent the Dow tumbling by 199 points in a single day.
"The markets were right to rally. They had become too gloomy about the outlook for interest rates," said Lyle Gramley, a former Fed governor, who predicted that Thursday's rate increase will be the last.
However, other economists were not so sure. While the Fed did talk about the economy slowing, Bernanke and his colleagues also expressed concerns about rising inflation pressures.
The central bank said that the "high levels of resource utilization" -- Fedspeak for tight labor markets -- and "the prices of energy and other commodities have the potential to sustain inflation pressures."
"The Fed did acknowledge that the economy is slowing but they also acknowledged that inflation is going up," said David Wyss, chief economist at Standard & Poor's in New York, who predicted a final 18th rate increase at the Fed's August 8 meeting.
Part of the reason that some analysts are looking for another rate increase is that Bernanke is still getting settled into his job, after having succeeded Fed legend Alan Greenspan in February, and he wants to prove his inflation-fighting mettle.
The Fed's latest move pushed the federal funds rate, the interest banks charge each other, to 5.25 percent and was quickly matched by a quarter-point increase in commercial banks' prime lending rate, which rose to 8.25 percent. Both rates were the highest in more than five years.
Some economists said the Fed's statement gave hints of a split on the Federal Open Market Committee, the panel of Fed board members and regional bank presidents who meet eight times a year to decide interest rates.
"I think we see evidence in the release of a spirited debate among policy-makers," said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.
"It represents a compromise between more hawkish members who are still worried about inflation and others who are starting to worry that the Fed could overdo it on the tightening side," Jones said.
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