Monetary policy-makers predicated interest rate decision on worries about resurgent inflation
WASHINGTON – Worried that high energy costs could feed into other prices and spread inflation throughout the economy, Federal Reserve policy-makers in November felt the need to keep pushing interest rates higher.Minutes of the Fed’s closed-door meeting on Nov. 1, released Tuesday, underscored that policy-makers were more concerned more about the prospects of resurgent inflation than a serious slowdown in the wake of a trio of deadly hurricanes that ravaged the Gulf Coast.Even though energy prices, which surged to record highs after Hurricane Katrina struck in late August, had moderated by then, “upside risks to the outlook for underlying inflation remained a key concern,” according to the minutes.”There was a risk that the large cumulative rise in energy and petroleum product prices through the summer would be transmitted to core consumer prices,” which exclude food and energy, the minutes said.Core prices are closely monitored by the Fed to get a sense of how a wide variety of prices for goods and services – other than food and energy – are behaving.”A number of firms had been reporting a greater ability to pass through increases in energy and other costs to customers, though evidently more so to other businesses than to consumers,” the minutes said.To fend off inflation, the Fed at the November meeting did in fact boost its key short-term rate, called the federal funds rate, by a quarter percentage point to 4 percent, the highest in more than four years. It marked the 12th increase of that size since the Fed began to tighten credit in June 2004.The federal funds rate, the interest that banks charge each other on overnight loans, influences a variety of other interest rates, including banks’ prime lending rate used for consumer and business loans.According to the minutes, policy-makers felt fairly confident that the economy was weathering the blow of the hurricanes well.”The economy seemed to be growing at a fairly strong pace, despite the temporary disruptions associated with the hurricanes,” the Fed document said.The minutes said that all Fed policy-makers believed that it was important to keep raising rates “in order to check upside risks to inflation.”Still, rate decisions would be “increasingly sensitive to incoming economic data,” the minutes said. “Some members cautioned that risks of going too far with the tightening process could also eventually emerge.”Analysts expect the Fed to bump up rates again at its next meeting, Dec. 13, the last scheduled Fed meeting of this year.Another increase could come on Jan. 31, which would be the last meeting for Fed Chairman Alan Greenspan, who will retire that day after 18-plus years at the helm. His chosen successor is Ben Bernanke, a former Fed member, and Princeton professor, who is currently the White House’s top economist. His first Fed meeting as chairman is expected to be March 28.In other observations on the economy, the Fed minutes suggested that consumer spending, which has been holding up under the strains of elevated energy prices, will continue to be closely tracked. Some Fed participants noted that “the erosion of consumer confidence, still-elevated gasoline prices and the prospect of higher heating bills might augur weakness ahead.”On the housing market, a slowing in house price gains in some areas and recent declines in home equity lending at banks “could be indicating that the long-expected cooling in the housing market was near,” the minutes said.The Fed minutes also said that policy-makers continued to discuss how the brief policy statements issued at the end of the Fed’s meetings might evolve over time. Some of the language, particularly that related to policy outlook, “would have to be changed before long,” the minutes said. Specifics weren’t provided.