Bernanke raises rates to 4.75 per cent at first policy-making meeting

In its first policy-making session under Ben Bernanke, the Federal Reserve yesterday raised its key short-term rate for the 15th consecutive time and signalled that one or more further rises may be needed before the current 21-month tightening cycle comes to an end.

Albeit widely expected, the 25 basis points increase, coupled with the rates warning, sent stocks skidding on Wall Street, boosted longer-term bond yields and strengthened the dollar. The overnight federal funds rate now stands at 4.75 per cent, compared with just 1 per cent in the summer of 2004 - the lowest level since the Eisenhower era in the late 1950s.

All attention, however, was focused on the finely calibrated wording of the statement from the rate-setting Federal Open Market Committee. According to the FOMC, growth "rebounded strongly in the current quarter" after the slackening at the end of 2005. Inflationary expectations "remain contained", but rising energy costs and other factors could strengthen such pressures. "Some further policy firming may be needed," as conditions dictated, the committee warned.

The statement basically confirms what has long been known about Mr Bernanke, the former Princeton economics professor who took over from the legendary Alan Greenspan on 1 February: that he sees fighting inflation as a top priority - indeed, to the extent of having the Fed define a clear inflation target like that followed by the European Central Bank, and that for now, at least, the emphasis will be on "continuity", building on Mr Greenspan's 18 12 year reign at the US central bank.

But it also leaves scant doubt that the Fed's benchmark short-term rate will rise to at least 5 per cent, and perhaps higher, in the months ahead, barring an unexpected and unlikely sharp downturn later in the year.

Reflecting the mood, the Dow lost almost 100 points in the hour after the announcement.

Mr Bernanke's debut came at a delicately balanced moment for the economy, amid sharply conflicting signals about the future. After growing by a feeble 1.6 per cent in the final 2005 quarter, GDP is set to expand by 4.5 per cent or more in first quarter of this year, with some signs that core inflation is gathering speed.

Consumer confidence figures yesterday from the Conference Board were buoyant, as the closely watched index leapt to 107.2 in March from an upwardly revised 102.7 in February. "This is a very strong survey," Richard Iley, the senior economist at BNP Paribas, North America, said.

On the other hand, the hugely important housing sector has stalled. Across the US, home prices are levelling off. Should they start to fall, consumer borrowing and spending - largely financed by drawing on home equity - will decline. This could place a significant brake on the economy. Most economists thus expect GDP growth to slow to a little over 3 per cent in the second half of 2006. Even so, they believe, further rate increases are on the way, as the new chairman seeks to impose his authority.

Peter Morici, the business professor at the University of Maryland, argues: "Ben Bernanke has yet to establish his credibility with financial markets as an inflation fighter. If the economy slows but inflation is harnessed, Wall Street will bestow laurels on him. But if inflation gets out of control, it will make him the goat." Here, too, the signals are mixed. Some contend that globalisation, whereby goods and services can be supplied from all over the world, curbs the bargaining power of US workers and thus reduces inflationary pressures.

Since January, wholesale prices have been rising at a 4 per cent annual rate, while petrol prices have recently jumped in line with a higher oil price. Retail inflation is running faster than in 2005, at slightly over 2 per cent.

Already, Mr Bernanke has sent a message that he will take no chances. In a much-anticipated speech to the Economic Club of New York last week, he insisted that the low level of longer-term rates - famously described as "a conundrum" by Mr Greenspan - did not necessarily signal an impending slowdown.

He was also relatively sanguine about the faltering housing market, suggesting that rising incomes were a more important factor than rising mortgage rates in shaping consumers' outlook.