Washington – Pause: n. a temporary stop in action. Stop: v. to bring to an end.
After a widely expected interest-rate increase today, the Federal Reserve may opt to take a pause in its two-year rate-raising campaign.
But that doesn’t necessarily mean the central bank is finished, says Chairman Ben Bernanke.
In other words: “Pause” doesn’t mean “stop.”
The Fed chief hasn’t specified when the central bank might take a break from boosting rates. But many economists predict it will be soon – at the Fed’s June 28-29 meeting. Others think it will be later this summer.
“Bernanke has to walk a tightrope between raising rates too much and slowing the economy or pausing too soon and letting the inflation monster out of the bag,” said Greg McBride, senior financial analyst at Bankrate.com.
What economists agree on is that the Fed will push up its federal funds rate by one-quarter percentage point to 5 percent today. That would mark the 16th increase of that size since the Fed began to tighten credit in June 2004.
In response, commercial banks are expected to raise their prime lending rate – for certain credit cards, home-equity lines of credit and other loans – by a corresponding amount, to 8 percent.
Such moves would lift both the funds rate and the prime rate to their highest points since the spring of 2001.
Many believe today’s expected increase will be the last one for the funds rate for a while. The funds rate, the interest that banks charge one another on overnight loans, affects a variety of other interest rates charged to consumers and businesses and thus is the Fed’s primary tool for influencing activity.
Economists in this camp predict the Fed will pause at the June meeting because policymakers don’t want to push rates too high, which could hurt the economy.
Other economists, however, insist the Fed will have to push the funds rate up to 5.25 or 5.50 percent to keep inflation under control. Then the central bank will be able to safely move to the sidelines for a while.
Both camps of economists agree it is a delicate dance that Bernanke and his colleagues face in deciding when to wind down their credit-tightening campaign.
“It is an extremely difficult process to get it exactly right,” said Gregory Miller, chief economist at SunTrust Banks.
