updated 8/29/2006 5:46:03 PM ET 2006-08-29T21:46:03

Worries about short-term damage to the economy led Federal Reserve policymakers at their August meeting to halt a more than two-year-old interest rate-raising campaign.

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By taking a breather, the Fed would have time to assess the toll on economic activity and inflation of its 17 rate increases since 2004, according to minutes of the Fed’s Aug. 8 meeting, released Tuesday. It can take time for rate increases to work their way through the economy.

“The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much,” the minutes said.

Stocks, which had been in negative territory, turned positive after the minutes were released as investors viewed the Fed as concerned about inflation, but patient on the need for more interest rate increases.

The Fed’s goal is to push up rates to thwart inflation but not so much as to cripple economic activity. It’s a tricky task, economists say.

Fed chief Ben Bernanke and all but one of his central bank colleagues voted to hold the federal funds rate steady at 5.25 percent at the August meeting. The funds rate, the interest banks charge each other on overnight loans, affects a variety of other interest rates charged to businesses and consumers. It is the Fed’s main tool to influence the economy.

The lone dissenter, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., favored another rate increase. “He believed that further tightening was needed to bring inflation down more rapidly than would be the case if the policy rate were kept unchanged,” the minutes said.

Even though nearly all the Fed members voted to leave the funds rate alone in August, many thought the decision to do so “was a close call” and that another rate increase “could well be needed” to fend off inflation, the minutes said.

Still, members expressed hope that the slowing economy would eventually lessen inflation pressures.

“Most members anticipated that inflation pressures quite possibly would ease gradually over coming quarters and the current stance of policy could well prove to be consistent with satisfactory economic performance,” the minutes said.

Oil prices, which had surged to a new record high in mid-July, have retreated and are now hovering below $70 a barrel.

Fed policy-makers made clear that they would be keeping a close eye on inflation barometers.

Economic growth, meanwhile, slowed in the spring as the housing market lost steam and consumers and businesses alike tightened the belt. Fed members also suggested they would be keeping close tabs on the housing slowdown, which has important implications for overall economic activity.

The Fed’s next meeting on interest rates is Sept. 20. Many economists believe the Fed will again leave rates unchanged, while others predict another rate increase.

After digesting the Fed minutes, Ian Shepherdson, chief economist at High Frequency Economics, observed: “In short, the (Fed) appears to think it has done enough, though it is far from certain.”

At the August meeting, Fed policymakers also discussed ways to improve their communications with Wall Street and Main Street. That discussion will be resumed in the fall at the Fed’s October meeting, the minutes said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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