WASHINGTON -- The Federal Reserve paused yester day after more than two years of 17 consecutive interest-rate hikes, but it cautioned that future rate increases may be needed if inflation doesn't subside.
``The extent and timing of any additional firming . . . will depend on the evolution of the outlook for both inflation and economic growth," the Fed's policy-making body, the Federal Open Market Committee, said in a statement.
The Fed's decision to leave its benchmark ``federal funds" rate at 5.25 percent is good news for borrowers who have adjustable-rate mortgages and variable-rate lines of credit. Bank rates for these loans are generally pegged to the fed-funds rate.
When the Fed began tightening credit in June 2004, the fed-funds rate was 1.0 percent. The prime rate, what banks charge their best customers, was 4.22 percent, home-equity lines of credit were at 4.68 percent, and a one-year adjustable rate mortgage was 4.25 percent. Since then, as the fed-funds rate rose to 5.25 percent, banks raised those rates, respectively, to 8.25, 8.74, and 6.16 percent.
While the Fed's pause was welcome news for consumers, it fell far short of a declaration that the credit-tightening cycle has peaked. Soaring energy prices, strong global demand for commodities, and rising labor costs all increase the risk that inflation will grow worse.
``The inflation problem is going to get worse before it is going to get better," said Brian Bethune, US economist for Global Insight in Lexington.