Fed Raises Rate Again; Now What?

Interest rates on long-term loans, such as mortgages, have been rising in recent months, though more slowly than short-term rates. The average rate on a 30-year fixed-rate mortgage is 6.67 percent, still relatively low by historical standards and not much higher than its 6.31 percent level in June 2004, when the Fed started raising rates, according to Bankrate.com.

The Fed started slashing its benchmark rate in early 2001, after the stock bubble burst and as the economy began sliding into a recession that lasted from March through November of that year. Fed officials lowered the rate from 6.5 percent at the start of 2001 to a four-decade low of 1 percent in June 2003 to encourage consumers to keep borrowing and spending through the recession and initially sluggish recovery that followed.

Those low rates allowed auto dealers to spur sales through zero-percent loans and other financial incentives. Mortgage rates plunged, with the average 30-year fixed rate dropping to a recent low of 5.23 percent in June 2003, helping fuel the housing boom.

The Fed held its benchmark rate at 1 percent until June 2004, when the economy appeared healthy enough that it no longer needed so much extra stimulus. Fed officials have been raising the rate steadily since then, aiming for a neutral level, one that should neither boost nor slow growth.

The economy grew at a very rapid 4.8 percent annual rate in the first three months of the year. But Fed officials believe the expansion will slow in coming months, projecting that the economy will grow 3.5 percent over the whole year, the same rate as last year.

But inflation moved slightly higher in March. Wages are rising, and oil settled at about $72 a barrel yesterday on the New York Mercantile Exchange -- all signs of inflationary pressures.

Meanwhile, the housing market has started to slow, but consumer spending and business investment have been brisk.

Many investors had expected the FOMC to indicate it was ready to pause because Fed Chairman Ben S. Bernanke had told Congress last month that even if inflation risks remained, "at some point in the future the committee may decide to take no action at one or more meetings."

Bernanke, who succeeded Alan Greenspan as Fed chief in February, also made clear that a pause would not mean the committee was finished raising interest rates, saying that a pause at one meeting "does not preclude actions at subsequent meetings."

But futures markets indicated that many investors believed the new chairman had virtually promised an interest rate pause in June, despite Fed officials' comments to the contrary.

As Jack Guynn, president of the Fed Bank of Atlanta, said in a speech last week, "Given the range of possibilities ahead, I believe this is not a time for the Fed to pre-commit to a particular course of policy."