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Fed had worries on low rates

Bankers feared rise in speculation

WASHINGTON -- Some Federal Reserve policy makers expressed concern at their March meeting that a long period of ultra-low, short-term interest rates might lead to increased speculation in financial markets, according to minutes of the discussion released yesterday.

Federal Reserve chairman Alan Greenspan and his colleagues on the Federal Open Market Committee -- the group that sets interest rate policy in the United States -- unanimously agreed at the March 16 meeting and at a subsequent meeting Tuesday to hold a key short-term interest rate at 1 percent, where it has been since June. The rate is at a 46-year low.

Policy makers at the March meeting discussed the pros and cons of leaving rates unchanged.

''Some members were concerned that keeping monetary policy stimulative for so long might be encouraging increased leverage and excessive risk-taking," the minutes said. The minutes didn't provide details about the members' concerns.

''Such developments could heighten the potential for the emergence of financial and economic instability" when an interest rate increase by the Fed proved necessary at some point in the future, the minutes said. Again, no details were provided.

Some members also said the low interest rates, along with stimulative tax policy, ''called for careful attention to the possible emergence of inflationary pressures."

Concerns about the health of the job market at the time, which has since shown signs of improving, was among the reasons the Fed decided to hold interest rates steady in March and to retain a promise to be ''patient" before it starting raising rates.

The Fed dropped that promise at Tuesday's meeting, prompting a growing number of economists to predict that the central bank will order its first rate increase in more than four years in August.

Some policy makers at the March meeting also said a case could be made at the time that deflation was no longer the main risk to the economy and that the risk of inflation warranted equal weight.

The minutes said that while ''many viewed it as a close call," all members agreed to retain the policy, which identified deflation as the biggest risk. At Tuesday's meeting, policy makers shifted their stance, saying ''the risks to the goal of price stability have moved into balance."

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