Federal Reserve policy-makers worried about inflation risks at their meeting on Nov. 1, but were mulling how to lay the groundwork for ending a rate-rise cycle that has lasted for a year and a half, meeting minutes released on Tuesday showed.
“All members believed it important to continue removing monetary policy accommodation in order to check upside risks to inflation and keep inflation expectations contained, but noted that policy setting would need to be increasingly sensitive to incoming economic data,” the minutes said.
Though no explicit timetable was discussed for ending the rate-rise campaign that began in June 2004, “some members cautioned that risks of going too far with the tightening process could also eventually emerge,” the minutes said.
Stock prices rose on the hope that rate rises may soon end, as did prices for U.S. debt securities, as investors took heart from the Fed’s wariness about going too high with increases. But the dollar’s value slipped against other currencies.
Policy-setting members of the U.S. central bank’s Federal Open Market Committee lifted rates for a 12th straight time at the Nov. 1 meeting, bringing the trendsetting federal funds rate for overnight loans between banks to 4 percent.
Fed officials had been describing the level of interest rates as accommodative and has said since in every post-FOMC statement since May 2004 that they could be raised at a ”measured” pace.
But the minutes showed officials thought the time to offer a new appraisal was nearing. “Several aspects of the statement language would have to be changed before long, particularly those related to the characterization and outlook for policy,” the minutes said.
Near neutral?
Global financial markets have been watching intently for signs that U.S. central bank policy-makers may soon have the federal funds rate at a level they consider neutral -- one that neither hinders growth nor permits inflation to take hold.
Analysts said the minutes indicate the U.S. central bank is planning for an end to rate hikes even if it is not there yet.
“I guess you could (say) that the Fed sees the light at the end of the tunnel,” said economist Paul Kasriel of Northern Trust Co. in Chicago. “They believe that they have taken a lot of accommodation out of policy now.”
There has been speculation that two more quarter-point rate rises may lie ahead though some feel that Ben Bernanke, the nominee to replace Federal Reserve Chairman Alan Greenspan at the end of January, may want to levy a third hike as a type of anti-inflation marker.
The Nov. 1 minutes said the FOMC was wary about companies’ growing power to push through price rises and make them stick.
“Although oil and gasoline prices had fallen in recent weeks and core inflation had remained benign, some businesses had reported increased ability to pass through cost increases in the environment of higher headline inflation,” they said.
“Upside risks to the outlook for underlying inflation remained a key concern,” the minutes said. In particular, policy-makers cited the possibility of large rises in energy costs over the past summer being transmitted to core consumer prices.
Core consumer prices exclude food and energy items but, since energy is a necessity for all sectors, accumulated energy price rises eventually can push up costs throughout the economy.
The minutes said that a red-hot U.S. housing boom showed signs of coming off the boil and that, over time, likely will induce consumers to save more.
“Over the longer term, with house price gains moderating and perhaps greater perceived needs for retirement purposes, the household savings rate was likely to rise gradually,” the minutes said.