Fed Leaves Investors Guessing on Next Step

In this April 27, 2006, file photo, Federal Reserve Chairman Ben Bernanke gestures while he testifies on Capitol Hill before the Joint Economic Committee. (AP Photo/Mannie Garcia) (Mannie Garcia - AP)

WASHINGTON -- The Federal Reserve is no longer on autopilot when it comes to boosting interest rates. Its next decision, at its June meeting, could be for another increase. Or it could opt for the first time in two years to take a break from its credit-tightening campaign and leave rates alone, depending on how economic activity and inflation unfold.

With the central bank having bumped up borrowing costs steadily since June 2004, new Fed Chairman Ben Bernanke and his colleagues on Wednesday suggested that future interest rate decisions will be much less predictable.

Those looking for a clear signal one way or the other about future moves didn't get one. "The Bernanke monetary sphinx did not blink," said Brian Bethune, economist at Global Insight.

The Fed's latest action pushed up the federal funds rate, which is the interest that banks charge each other on overnight loans, to 5 percent. It marked the 16th consecutive quarter-point increase in the past two years.

In response, commercial banks raised their prime lending rate by a corresponding amount, to 8 percent, for certain credit cards, home equity lines of credit and other loans.

Both the funds rate and the prime rate are at their highest points in just over five years.

Future decisions on interest rates, though, will hinge more heavily on what upcoming barometers say about economic activity and inflation, the Fed policy-makers indicated.

If surging energy prices should spark broader inflation, the Fed could opt to bump up rates again. If the economy should show signs of slowing more than anticipated, a pause in rate raising could be in store.

"The Federal Reserve doesn't want to be viewed as being behind the curve in fighting inflation. At the same time, the other misstep they desperately want to avoid is to continue to hike rates just as business activity begins to downshift," said Bernard Baumohl, executive director of the Economic Outlook Group, a consulting firm.

On Wall Street, stocks tumbled Thursday as surging energy prices added to investors' uncertainty about inflation and higher interest rates. The Dow Jones industrials plunged 116 points in morning trading.

Fed policy-makers on Wednesday offered a largely positive assessment of the economic climate, although they continued to express concern about the potential for inflation to flare up.

Further moves "may yet be needed to address inflation risks," they said. Any such action, they added, "will depend importantly on the evolution of the economic outlook as implied by incoming information."