The US Federal Reserve raised interest rates for a 16th time in a row and said it would keep raising rates if necessary to check inflation, although it opened the door to a possible rate pause.
The Fed emphasised its course will be highly dependent on how the economic outlook unfolds.
The US central bank's policy-setting Federal Open Market Committee (FOMC) voted unanimously yesterday to raise the benchmark federal funds rate target a quarter-percentage point to 5 per cent, its highest level since April 2001.
But the FOMC - meeting for only the second time under new chairman Ben Bernanke - said in a statement issued after the meeting that further policy firming may be needed.
"The committee judges that some further policy firming may yet be needed to address inflation risks, but emphasises that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information," the statement read.
Bond prices fell immediately after the FOMC decision was published and stocks also were down as traders saw the statement as having a hawkish tone.
While raising the prospect that it could step to the sidelines, at least temporarily, the central bank made clear it still had concerns on inflation.
"Possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures," the Fed said.
The carefully parsed Fed statement had analysts guessing what the Fed will do at upcoming meetings.
"The Fed is going to keep us waiting and keep us guessing," said John Augustine, chief investment strategist at Fifth Third Asset Management in Cincinnati.
Minutes of the Fed's previous policy-setting session in late March showed most FOMC members believed the rate-raising campaign they kicked off in June 2004 was near an end.
Mr Bernanke tried to send a more nuanced message in testimony to congress late last month.
He said that while the central bank might take no action at one or more meetings in the future as it awaited more information on the economic outlook, such a pause would not necessarily mean the Fed was done.
The Bank of England gave a clear signal to the markets yesterday that UK interest rates were likely to rise over the next year. Markets had already begun to expect two or more quarter point interest rate rises over the next two years.
The bank's monetary policy committee, the rate setting body,published forecasts showing inflation above its 2 per cent target at every point over the next two years on the assumption that interest rates remained on hold at 4.5 per cent.
In contrast, forecasts showed British inflation on target in two years' time if interest rates were to rise by close to 0.5 percentage points over the next two years.- (Reuters, Financial Times service)
