FOMC Raises Funds Rate To 5%

As was widely expected, the Federal Open Market Committee (FOMC), the U.S. Federal Reserve System's policymaking body, raised the federal funds target rate to 5% on May 10. It was a 25-basis-point increase, and puts the rate five times higher than the 1% it was two years ago.

The committee suggested that additional increases may be necessary, but it was vague about when, stating "the extent and timing of such firming will depend importantly on the evolution of the economic outlook as implied by incoming information." In other words, it will wait until the numbers are clearer.

Significantly, despite recent increases in energy prices, the FOMC said "inflation expectations remain contained." On economic growth, which was strong in the first calendar quarter of 2006, the FOMC said it was "likely to moderate to a more sustainable pace as the housing market cooled and the effects of past interest rate increases and higher energy prices worked through the system."

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