Fed boosts interest rate to highest level in 5 years

WASHINGTON -- The Federal Reserve on Wednesday raised a key interest rate to the highest level in more than five years but signaled that it may pause to assess the impact of its string of rate hikes.\nThe Fed boosted its target for the federal funds rate to 5 percent. The funds rate, the interest that banks charge each other, stood at a 46-year low of 1 percent when the central bank began raising rates in June 2004 to keep inflation under control.\nIn its statement announcing the decision, Fed policy-makers indicated they might take at least a brief pause in pushing rates up further. It said the "extent and timing" of further rate increases would depend on future economic data.\nThe Fed's rate hikes have raised the borrowing costs for millions of Americans on everything from adjustable rate home mortgages to auto loans. Commercial banks were expected to quickly match the Fed action by boosting the prime lending rate to a five-year high of 8 percent.\nFed Chairman Ben Bernanke had raised expectations that the central bank was getting ready to pause when he said in congressional testimony on April 27 that the central bank might take a break for "one or more meetings."\nBernanke, who succeeded Alan Greenspan as Fed chairman Feb. 1, said a pause would give the central bank time to assess the impact that its long string of rate increases was having on the economy.\nIn the statement announcing Wednesday's rate increase, the Fed said that some further rate hikes "may yet be needed." That marked a modification from the March statement which stated further rate increases "may be needed."\nIt added another phrase in the latest statement saying that "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."\nBernanke had created confusion about the exact meaning of his congressional remarks when he was quoted by CNBC as saying that financial markets had misread his congressional testimony.\nThat comment came after bond prices, always sensitive to inflation worries, had fallen on fears that Bernanke would not be as tough as Greenspan had been in fighting inflation.\nPrivate economists are split over whether Wednesday's rate hike will be the last for awhile or whether the Fed may pause for one or two meetings and then raise rates another one or two times to make sure that a recent jump in energy prices does not spill over into more widespread inflation problems.\nIn assessing the current state of the economy, the Fed's brief statement tracked the comments Bernanke had made to the Joint Economic Committee.\nThe statement said that while economic growth had been "quite strong so far this year," the central bank still expected growth would moderate to a more sustainable pace, "partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."\nThe overall economy grew at a sizzling pace of 4.8 percent in the first three months of this year, the fastest spurt for the gross domestic product in 2 1/2 years. But private forecasters believe growth has slowed in the current quarter, reflecting in part rising mortgage rates, which have dampened home sales.\nOn inflation, the Fed said that the surge in energy prices so far had had "only a modest effect on core inflation" with inflation expectations remaining contained.\nThe statement noted a unanimous vote for the quarter-point increase in the funds rate.