All eyes on Bernanke as Fed to raise rates to 5%

The US Federal Reserve is set to raise interest rates today to the highest level in five years and may use a post-meeting statement…

The US Federal Reserve is set to raise interest rates today to the highest level in five years and may use a post-meeting statement to open the door to a pause after 16 straight hikes.

Meeting for only the second time under chairman Ben Bernanke, the central bank's policy-setting Federal Open Market Committee appears certain to raise the overnight federal funds rate by a quarter-percentage point to 5 per cent.

The latest Fed salvo against inflation would take the benchmark lending rate to its highest level since April 2001, just after the US economy slipped into recession.

The seeming certainty of the rate decision, which will be announced around 6:15pm, stands in contrast to the questions surrounding what the Fed might say about its future plans in its post-meeting announcement.

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Some economists think the widely anticipated rate increase will be the last in a cycle dating to June 2004; others think officials might take no action at their subsequent meeting in June but that the economy's momentum will force the Fed to push credit costs higher later in the year to keep inflation tamped down.

The heightened uncertainty is also in evidence at the central bank, and policy-makers are expected to step back from guidance they offered after the last rate hike in March that "some further policy firming may be needed."

Economists at Goldman Sachs said carving out room for a possible pause after foreshadowing rate hikes for the past two years poses "an unprecedented challenge" for the Fed.

Mr Bernanke told Congress two weeks ago the Fed could pause at some point, even if inflation risks were not entirely balanced, in order to assess incoming data and get a clearer sense of the US economy's path.

He said, however, such a pause would not preclude further rate moves and economists expect the Fed's statement to indicate a willingness to continue to push rates higher.

The difficulty of the Fed's task is underscored by the tension between the central bank's forecast of slower growth ahead with recent signs of bubbling inflation pressures.

The Fed's favored gauge of core consumer prices rose a stiff 0.3 per cent in March, pushing the 12-month increase up to 2 per cent -- the top of Bernanke's comfort zone. It appears inflation expectations are drifting up as well.

However, in a potential sign of slowing economic growth, the U.S. economy created only 138,000 jobs in April, far fewer than analysts had expected.