Fed move on rates will be higher, minutes show
WASHINGTON - Federal Reserve policy makers agreed this month that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision.
"Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments," the minutes said.
The minutes show a debate over the magnitude of the inflation threat, with two groups of officials making different judgments on the impact of the recent slide in commodity prices. Policy makers also diverged on whether financial turmoil continues to pose the risk of a more severe credit crunch.
The Fed left its benchmark lending rate unchanged at 2 percent on Aug. 5 for the second straight meeting. At the time, traders estimated a 31 percent chance of at least a quarter-point increase by year-end, futures prices show. Now, that probability is 22 percent.
"There is a big split . . . , no doubt about that," said Lyle Gramley, a former Fed governor and senior economic adviser at Stanford Group Co. in Washington. "We know there is a severe credit crunch, but it is difficult outside the housing market to pin down how much impact it is having on the economy."
Yesterday's release also showed that Philadelphia Fed president Charles Plosser opposed creating a new program offering investment banks options on borrowing Treasuries from the central bank.
"Many participants noted that the financial system remained fragile, with some expressing continued concern about the possibility of an adverse feedback loop" where tighter credit conditions push the housing market even lower, the minutes said. "Several other participants suggested that the risks to the financial system had receded."
With market instability triggering a rise in borrowing costs for households and businesses, "most members did not see the current stance of policy as particularly accommodative," the minutes said.
Chairman Ben S. Bernanke said the Fed "is committed to achieving medium-term price stability and will act as necessary to obtain that objective" at the Jackson Hole, Wyo., monetary conference on Aug. 22.
"A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets," the minutes said.
With the economy faltering, US central bankers are trying to reconcile both aspects of their dual mandate to limit inflation while sustaining economic growth that maximizes employment.
The Fed staff "marked down" its gross domestic product growth outlook for the second for 2009, the minutes said. Prices, minus food and energy, were "expected to pick up somewhat in the second half of the year."
Some 463,000 Americans have lost jobs since January as the worst housing recession in 25 years has curtailed spending and bank lending. Economists expect annualized rates of growth of just 1.2 percent in the third quarter and 0.45 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey. 