Fed raises key rate, leaves door open to more `firming'

Funds rate is boosted to 4.75%, but some foresee 5%


WASHINGTON -- The Ben S. Bernanke Federal Reserve looked much like the Alan Greenspan Federal Reserve yesterday, as the central bank boosted interest rates for a 15th straight time and signaled there likely will be another increase in May.

In his first meeting as chairman of the nation's independent monetary authority, Bernanke showed he was just as willing as Greenspan to stage pre-emptive strikes against inflation expectations.

In boosting its benchmark short-term interest rate by a quarter percentage point, to 4.75 percent, the Fed imposed heavier borrowing costs on Americans who have home-equity loans or other short-term adjustable-rate loans.

An increase to 5 percent is expected at its May meeting, and some analysts said there might be two or more after that.

Paul L. Kasriel, an economist at Northern Trust Co. in Chicago, said Bernanke and his colleagues at the Fed are flirting with "the disaster of a recession" by continuing to raise interest rates.

"If a recession occurs," he wrote in an analysis after the Fed's action, "then the [Fed] can be sure there won't be any inflation. Then the [Fed] can start cutting."

Few analysts predict a recession this year, but the consensus is that the economy, now growing at a rapid annual rate of as much as 5 percent, will begin to cool over the next few months as the housing market slows and consumers spend at a slower pace.

There could be a political impact if the economy slows more than expected as the November midterm elections draw nearer. A more pronounced slowdown could hurt Republicans at the polls.

With the increase, short-term interest rates are at the highest level since the spring of 2001. There was a slight rise in long-term bond rates yesterday, which some analysts took as a positive sign that a sharp slowdown is not in the works.

Bernanke, a former Bush economic adviser and a teacher of economics, took over from Greenspan Feb. 1. He has signaled that he wants the central bank to be more "transparent" in its communication with the public and to tie its interest-rate decisions more directly to the rate of inflation than it did under Green- span.

The main inflation the Bernanke Fed showed yesterday is the number of words it took to explain its decision: 111. At Greenspan's last meeting, the paragraph explaining the central bank's move took only 50 words.

The Fed said the economy has "rebounded strongly" from a slow fourth quarter of 2005, "but appears likely to moderate to a more sustainable pace."

Higher energy and commodity prices have had only a modest impact on inflation, the central bank said, and higher productivity has kept higher wages from becoming an inflation problem.

Still, the Fed said, there is a risk that a stronger economy could strain resources and that energy and commodity prices could strengthen inflationary pressures.

"Some further policy firming may be needed," it said, signaling that another interest-rate increase is likely in May.

The Fed's policymaking arm, the Federal Open Market Committee, embarked on its campaign to raise interest rates to a more "neutral" level in June 2004.

By definition, a "neutral" rate would keep the economy growing and inflation in check at the same time.

Pierre Ellis, an economist with the New York consulting firm of Decision Economics, saw "at least one more interest-rate increase, and probably two or three more. We don't know where neutral is. The Fed has already told us it is willing to risk going a bit too far" to squelch inflationary expectations.

William Neikirk writes for the Chicago Tribune.

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