Following in the footsteps of former chairman Alan Greenspan, the U.S. Federal Reserve Board raised its target for the federal funds rate by 25 basis points to 4.75% at the first meeting of Ben Bernanke’s tenure as chairman.

In response, Bank of Montreal noted that the Fed extended the tightening cycle because “economic growth has rebounded strongly in the current quarter” and “possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.”

BMO adds that Fed policymakers continue to judge “that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.” It still expects one final rate increase to 5.00% at the May 10 policy meeting. “Beyond that, we see rates on hold for the remainder of this year as economic growth moderates, before pulling back to 4.50% in the first half of next year as growth temporarily slows to a below-potential rate in response to past monetary tightening,” it predicts.

National Bank Financial reports that Bernanke’s statement, which is longer than the one Greenspan issued in January, provides more insights about the Fed’s view on the economy and its inflation prospect than usual.

“According to the Fed, the economy appears likely to moderate to a more sustainable pace while inflation expectations remain contained. This does not sound like a situation needing a lot more Fed tightening,” NBF says. “Still, the Fed maintained its bias, leaving its options open.

“While the Fed is no longer on the auto pilot its future actions will be driven by economic data and its assessment of why long rates remain so close to the fed funds rate,” NBF adds. It also believes that the odds favour another rate hike at the May 10 meeting. “Obviously a lot of water is going to flow under the bridge between now and then. Among other things, we will have to see if housing weakness spreads to the rest of the economy,” it says.

BMO Nesbitt Burns agrees that the release provides more clarity than is usual, but notes that the markets don’t like the message. “Some were hoping that Bernanke would be a bit less hawkish on rate hikes. After all, he is the guy that was so worried about deflation,” BMO Nesbitt says. It also expects another 25 bps hike in May.

“My view is that although the housing market has slowed in response to higher interest rates — acknowledged by the Fed in that they described growth as ‘solid’ last time, whereas they said it will ‘moderate to a more sustainable pace’ this time — they are still concerned about inflation pressures emanating from a fully employed economy and from potential commodity-price increases. This is very much in line with the last press release of the FOMC under Greenspan,” BMO Nesbitt notes. “In other words, a decline in the unemployment rate is a key threat to inflation, and depending on the data, the Fed is inclined to raise rates again in May. It would surprise me, at this point, if they didn’t.”

TD Bank concludes that another hike in May, “cannot be ruled out. But it’s not a done deal either.”

In a related action, the Board of Governors also approved a 25-bps increase in the discount rate to 5.75%.