Federal Reserve policy-makers, concerned about potential inflation growth, debated last month whether they needed to signal the possibility of a more aggressive campaign to raise interest rates, according to meeting minutes released Tuesday.
Specifically, policy-makers discussed whether they should at some point abandon their stance of gradually raising short-term interest rates. In the end, however, they decided to stay with that approach — for now.
Fed Chairman Alan Greenspan and his colleagues boosted short-term interest rates by a quarter-percentage point at the March 22 meeting, the seventh increase of that size since the Fed began its tightening campaign last June. The overnight lending rate now stands at 2.75 percent, up from 1 percent a year ago.
Even though the Fed took a much more hawkish tone about the possibility of an inflation flare-up, it still stuck with a policy statement indicating future rate increases would come at a pace “that is likely to be measured.” Economists have come to view "measured" as meaning a quarter-point at a time.
Stock prices, which had been sharply lower, reversed course and headed into positive territory after the minutes were published. Analysts said investors were relieved because the minutes signaled the Fed is unlikely to raise rates more aggressively in the near future.
“What this tells you is ... the most likely path is for the Fed to continue to raise rates at a measured pace in the period ahead rather than becoming more aggressive,” said Michael Sheldon, chief market strategist for Spencer Clarke, a New York brokerage.
Fed officials discussed the pros and cons of maintaining the measured stance at the March meeting.
“Some expressed the view that such language could constrain future policy inappropriately; while these concerns were not new, they were now felt to be more pressing, as the odds that the committee might need to step up the pace of policy firming were thought to have increased,” the Fed minutes said.
Most members, however, believed the “measured” language was clearly conditional on how the economy and inflation unfolded. Thus, they believed the wording didn’t rule out either speeding up the Fed’s rate-raising campaign or taking a pause if conditions warranted.
While various viewpoints were expressed about the “measured” stance, the minutes revealed that Fed policy-makers sensed a need for possible change down the road.
“Members recognized that the committee’s statement would need to evolve over time,” the minutes said.
Private economists believe it is only a matter of time before the Fed does away with the promise of a measured pace. Some believe it could abandon the language as early as its next meeting May 3.
Economists believe the Fed is trying to prepare Wall Street and Main Street for a credit tightening campaign that may last longer — perhaps well into 2006 — than some previously had expected.
Analysts said the minutes imply a debate within the Fed about whether its policy is well attuned to keeping inflation risks under control.
“Clearly there is a debate about whether they need to turn more aggressive,” said economist Steve Gallagher of SG Corporate & Investment Banking in New York, But he said their was no clear-cut conclusion.
In fact, several analysts thought the minutes implied that while it might be on heightened watch, the Fed was prepared to continue with modest rate rises.
“This reiterates the view of many that a quarter-point per meeting for the rest of this year is in the cards,” said Tim Mazanec, director of foreign exchange at Investors Bank and Trust Company in Boston.