Fed raises interest rate at Greenspan's last meeting

WASHINGTON -- The Federal Reserve, in the last major piece of business for retiring chairman Alan Greenspan, pushed borrowing costs to the highest point in nearly five years Tuesday and hinted that another rate increase was possible.

Shortly after the Fed's rate announcement, the Senate -- showing broad bipartisan support -- approved on a voice vote Ben Bernanke's nomination to be the 14th chairman of the central bank. Bernanke, 52, will be sworn in as Fed chief this morning in a private ceremony at the Fed's marble headquarters.

That will make the historic changing of the guard at the Fed complete.

Greenspan, 79, ends an 18 1/2-year run, making him the second-longest serving chairman of the central bank. He turns over to Bernanke an economy that is in good shape but faces challenges.

"I know this institution will go on doing extraordinary things, and I will look on from the sidelines and cheer," Greenspan was quoted as saying at his farewell luncheon.

Questions persist about whether the housing market will continue to gradually decline or even crash. No one knows whether foreigners will maintain a hearty appetite for investing in the United States and continue to finance ballooning budget and trade deficits. Energy prices pose another wild card.

"Greenspan's shoes are very large and difficult to fill. If anybody is up to the task, Ben Bernanke is the guy," said Charles Ballard, economics professor at Michigan State University.

Bernanke, chairman of the White House's Council of Economic Advisers, is a former Fed governor and economics professor. He is considered one of the country's foremost economic thinkers and has written extensively about the Great Depression.

In opting to boost rates Tuesday, Fed policy-makers said "the expansion in economic activity appears solid" even though recent economic barometers "have been uneven." Inflation, they said, remains a concern. "Elevated energy prices have the potential to add to inflation pressures."

At Greenspan's final meeting, the Fed boosted the federal funds rate by one-quarter percentage point to 4.50 percent. The funds rate, the interest banks charge each other on overnight loans, affects a range of interest rates charged to consumers and businesses.

In response, commercial banks raised their prime lending rates -- for certain credit cards, home equity lines of credit and other loans -- by a corresponding amount to 7.50 percent.

The increases left borrowing costs at their highest level in nearly five years.

Many economists believe the Fed probably will boost the funds rate at least one more time -- to 4.75 percent -- at its next meeting on March 28, the first session Bernanke will preside over as chairman. A few, however, predict the funds rate could climb to 5.50 percent this year -- a move some analysts believe will be necessary to keep inflation under control.

Fed policy-makers on Tuesday left the door open to higher rates. "Some further policy firming may be needed" to keep the economy and inflation on an even keel, they said.

That marked a subtle change from the last meeting in December, when Fed policy-makers said "measured policy firming is likely to be needed."

By dropping the word "measured" and softening the forward-looking language on rates a bit, the Fed was attempting to give Bernanke more leeway to shape the future course of interest rate policy as he sees fit, economists said.

It provides "Bernanke with a clean slate," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The word "measured," which had been included in the Fed's previous rate-raising decisions, was viewed as signaling quarter-point rate increases.

All of the Fed's 14 rates increase since it began tightening credit in June 2004 have been by one-quarter percentage points.

On Wall Street, the Dow Jones industrials closed down 35.06 points to 10,864.86, reflecting investors' disappointment that the Fed failed to send a clear signal about when it would stop raising rates.

Federal Reserve policy-makers, at their previous meeting in December, suggested that their nearly two-year credit tightening campaign probably will be winding down. But they differed how much higher rates would need to go to accomplish their mission.

One of the first challenges Bernanke is likely to confront is deciding when to stop raising rates. If he waits too long, he could cripple the economy. If he stops too early, inflation could get out of hand.

Clues about Bernanke's thoughts on interest rates could come Feb. 15 when he delivers the Fed's twice-a-year report on the economy to Congress.

"Even with Bernanke at the helm, fighting inflation is still going to be the primary focus," said Greg McBride, senior financial analyst at Bankrate.com.

After the Fed, Greenspan plans to open an economic consulting business. He may show up on the speaking circuit and write a book.

Greenspan's agile handling of the economy has earned him several monikers, including the maestro, the greatest central banker who ever lived and the second-most important person in Washington.

On his watch, the economy -- from March 1991 to March 2001 -- posted its longest continuous expansion in history. The two recessions during his tenure were mild.

"He hovered over our economy like a caring guardian and did an incredibly fine job," said Sen. Chuck Schumer, D-N.Y.