Fed open to another rate hike, minutes show

/ Source: The Associated Press

Federal Reserve policy-makers last month indicated that interest-rate decisions could become less predictable, relying more heavily on short-term economic prospects than on more sweeping monetary strategy.

Minutes of the Fed’s closed-door meeting on Jan. 31 — Chairman Alan Greenspan’s last — were released Tuesday and offered insight into policy-makers’ thinking as they continue to contemplate what might be the appropriate end point in the Fed’s nearly two-year credit tightening campaign and as they prepared for new chief, Ben Bernanke.

“Although the stance of policy seemed close to where it needed to be given the current outlook, some future policy firming might be needed” to keep inflation and the economy on an even keel, according to the minutes.

One of the first challenges facing Bernanke, whose first day on the job was Feb. 1, will be to work with his Fed colleagues and decide when to stop boosting rates. If he stops too soon, inflation could get out of hand. If he waits too long, the economy could be hurt.

Bernanke’s first interest-rate meeting is March 27-28. In congressional testimony last week, he hinted that another rate increase could come at that time.

At the January meeting, the Federal Reserve boosted a key interest rate, called the federal funds rate, by one-quarter percentage point to 4.50 percent, the highest in nearly five years. That was the 14th increase of that size since the Fed began to tighten credit in June 2004.

The funds rate, the interest that banks charge each other on overnight loans, is the Fed’s main tool for influencing economic activity.

Going forward, though, the path of interest rates might not be nearly as predictable as it had been, Fed policy-makers indicated in the minutes.

“All members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence,” the minutes stated.

The rate increase in January was part of a long-term process in which the Fed strategy was focused on lifting rates from historically low levels to more normal ones. Before the Fed embarked on its rate-raising campaign, the funds rate had been sliced to 1 percent, a 46 year-low, in an effort to help the economy get back on its feet after the 2001 recession, terror attacks and a wave of accounting scandals that rocked Wall Street.

At the January meeting, policy-makers believed the economic slowdown seen in the final quarter of 2005, where gross domestic product expanded only at a feeble 1.1 percent pace, was probably due in part to “transitory factors” and they predicted that growth would bounce back in the current quarter.

To that end, economic barometers on factory production, job creation and business demand all pointed to improving economic activity, according to the minutes.

That was consistent with the economic assessment that Bernanke offered Congress last week.

The economy “would expand at a fairly robust pace of the first half of this year, boosted in part by spending on recovery activities associated with the (Gulf Coast) hurricanes,” the minutes stated. After that, growth was expected to moderate, mostly reflecting the impact of a slowing housing market.