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Fed raises rates; local bankers say move could slow market

The Federal Reserve on Thursday raised a key interest rate for the 17th consecutive time and signaled that further rate hikes may still be needed to fight inflation.

The central bank boosted the federal funds rate, the interest that banks charge each other, by a quarter-point to 5.25 percent, the highest level in more than five years. When the Fed started its credit tightening campaign two years ago, the funds rate stood at a 46-year low of 1 percent.

In the statement explaining the decision, Fed Chairman Ben Bernanke and his colleagues said that "some further policy firming may yet be needed to address inflation risks."

The committee said that "some inflation risks remain" even though it was likely that a moderation in economic growth "should help to limit inflation pressures over time."

The Fed's rate hikes have raised the borrowing costs for millions of Americans on everything from home mortgages to auto loans.

"(The Fed) is doing what it was designed to do and that is to begin to moderate the activity in the market place," said Michael Perry, president and chief executive officer of San Diego Trust Bank. "San Diego still seems to be fairly vibrant ... but it will slow things down a bit."

Commercial banks were expected to quickly follow the Fed announcement by raising their benchmark prime rate by a quarter-point to a five-year high of 8.25 percent.

The latest rate hike had been widely expected given comments Bernanke made on June 5 in which he called a rise in the rate of inflation an "unwelcome" development, a comment that contributed to a one-day 199-point drop in the Dow Jones industrial average.

Bernanke, a former Princeton economics professor and chief economist for the Bush White House, took over for venerable Fed Chairman Alan Greenspan on Feb. 1. Bernanke's first five months on the job have seen some rocky times as he has alternately sent markets soaring or plunging based on his comments.

Some economists have complained that Bernanke, in an effort to be more open about the Fed's thinking, is actually increasing confusion.

"The way they've done it makes people wait. With rates going up, (investors) keep saying, 'We'll just wait to deposit money,'" said James Kelley, president and CEO of San Marcos-based Discovery Bank, commenting on the effect increasing interest rates have on the local banking industry. "(Investors) tend to be on the sidelines a lot or they want to stay short, which makes it difficult to manage a large portfolio."

In its statement explaining Thursday's action, the Fed noted that recent indicators suggest that "economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

But at the same time, the statement said that "readings on core inflation have been elevated in recent months."

Analysts said the Fed could raise rates for an 18th time at the Aug. 8 meeting if those inflation reading continue to be above the Fed's comfort zone and the economy has not shown further signs of slowing.


Transcript reporter Jeran Wittenstein contributed to this report.

--- On the Net:

Federal Reserve: http://www.federalreserve.gov.

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