WASHINGTON - Federal Reserve policymakers were unanimous in the view last month that inflation, not economic weakness, was their major worry.
Minutes released Wednesday of their private discussions showed that Fed Chairman Ben Bernanke and his colleagues even discussed the possibility that future increases in interest rates might be needed to combat higher inflation.
Release of the minutes pushed stocks lower Wednesday as investors grew more pessimistic about the chances of any quick rate cuts to rescue the sluggish economy. The Dow Jones industrial average finished the day down 89.23 points at 12,484.23, based on preliminary calculations. The Fed had kept interest rates unchanged at the conclusion of their discussions on March 21. But policymakers changed the wording of their statement in such as way that financial markets believed the Fed might lower rates in the future if the economy weakened further.
That view led to a sharp rally on March 21. But Bernanke later told Congress the Fed had not changed its view, which is tilted toward greater worries about inflation.
According to the minutes, "the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."
The minutes also stated that "the committee agreed that further policy firming might prove necessary to foster lower inflation." The minutes said Fed officials believed that given the increased uncertainty about growth, "the statement should no longer cite only the possibility of further firming."
Some economists saw the March 21 statement and the newly disclosed discussion as evidence the Fed is having trouble communicating it intentions to markets.
"This is the most inconsistent piece of communication we have seen under the new Fed chairman," said David Jones, head of DMJ Advisors, a private consulting firm. "I think there is a big fight going on inside the Fed between officials who are more worried about inflation and those more concerned about growth."
Other analysts said the minutes of the Federal Open Market Committee, which sets interest rates, showed a central bank buffeted by the opposing forces of inflation and weaker growth.
The Fed next meets May 9. Private economists believe the Fed will leave its federal funds rate, the interest that banks charge each other, unchanged at 5.25 percent. The Fed last raised rates in June 2006.
The view is that the Fed will not consider cutting rates until inflationary pressures ease further.
Even though housing and manufacturing are in serious slowdowns, that weakness is not expected to threaten to derail an expected rebound in growth this year.
Bernanke has been head of the central bank since Feb. 1, 2006, succeeding Alan Greenspan, who held the chairman's job for 18Â½ years.
The Fed statement said policymakers had spent part of the two days in March discussing whether it would improve communications by establishing a specific target for inflation, something long advocated by Bernanke.
The minutes said Fed officials were in agreement that any such change would have to be consistent with the Fed's other goal of promoting maximum employment.
The minutes said that the central bank made no decisions on the issue and instead agreed to discuss the topic further at their next two-day meeting, in June.
In the discussion of the economy, the minutes showed that Fed officials recognized that they were facing opposing forces.
According to the minutes, a number of "weaker-than-expected" economic indicators increased the threat the economy would grow less strongly than expected. But at the same time, the minutes described various inflation readings as "uncomfortably high." Fed officials, the minutes showed, said the most likely outcome was for the economy to experience stronger growth later this year and for inflationary pressures to moderate. --- On the Net: Federal Reserve: http://www.federalreserve.gov AP-CS-04-11-07 1655EDT
comments powered by Disqus