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Fed minutes reveal increased inflation concerns

The Federal Reserve kept boosting interest rates in September partly out of concern that a break may mislead people into thinking it was worried about Hurricane Katrina's impact on the economy.
/ Source: The Associated Press

The Federal Reserve felt the need to keep boosting interest rates in September partly out of concern that a pause might mislead people into thinking it was too worried about the economic impact of Hurricane Katrina.

Minutes of the Sept. 20 closed-door discussions revealed increased worries among Fed policy-makers about inflation due to a spike in the price of gasoline and other energy products following hurricane-related production shutdowns caused by Katrina. But the Fed officials said they believed the hit to economic growth from Katrina would prove to be temporary.

Because of this view, the Fed expressed concerns that not raising rates at the September meeting would send the wrong signal about the Fed’s view of the underlying soundness of the economy.

“A pause in policy tightening at this meeting had the potential to mislead the public both about the committee’s perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability,” the minutes stated.

The Fed did boost the federal funds rate to 3.75 percent at its Sept. 20 meeting. It was the 11th consecutive increase since the Fed began gradually raising rates in June 2004.

The increase was approved on a 9-1 vote with Fed Governor Mark Olson dissenting. The minutes explained that Olson preferred pausing in the rate hikes until the Fed had a better view of how severe the impact from Katrina would be on the U.S. economy.

Since the Fed meeting, a number of the members of the Federal Open Market Committee — the panel of Fed board members in Washington and regional Fed bank presidents that sets interest rates — have expressed concerns in various speeches that inflation pressures have increased because of a sharp spike in energy costs.

Right after Katrina hit, crude oil prices briefly topped $70 per barrel in intraday trading in New York, while the nationwide average for gasoline climbed for a time above $3 per gallon.

The minutes showed that Fed officials believed that Katrina’s impact on economic growth would be shortlived. The Fed noted that Fed staff economists were lowering estimates for growth in the last half of this year “in light of the economic dislocation associated with Hurricane Katrina.” But the Fed economists boosted their estimates of growth for 2006 to reflect the rebuilding efforts that will be under way by that time.

On inflation, the Fed staff revised its inflation outlook higher for 2005 for overall inflation, reflecting the impact of higher energy prices, but said that overall inflation should be slightly lower for 2006.

Many private economists believe the Fed will keep boosting rates at its final two meetings of this year, increasing the funds rate to 4 percent at the Nov. 1 meeting and to 4.25 percent at the Dec. 13 meeting, the last of the FOMC’s eight regularly scheduled meetings for the year.