WASHINGTON -- Surging energy prices and a strengthening jobs climate raised the risk that inflation could worsen, underscoring the need for the Federal Reserve in August to keep raising short-term interest rates.
But Fed policy-makers suggested they could stick with their course of gradually bumping up rates in modest quarter-point increments because of other forces that could serve to blunt inflation, according to minutes released yesterday of the Fed's last meeting, on Aug. 9.
Competition from foreign companies is acting as an inflation-tempering force, the Fed minutes said. That competitive force is making it harder for US companies to fully pass through to consumers higher costs due to soaring energy prices.
''While most participants viewed the risks to inflation as having ticked up over the intermeeting period, many also cited factors that . . . would tend to hold inflation pressures in check," the minutes stated. ''The continuing expansion of global trade was seen as an important factor limiting firms' ability to pass through cost increases."
Instead, companies are paying for a chunk of the higher energy and other costs out of their profits, which are getting squeezed, the minutes suggested.
At the August meeting, Fed policy-makers lifted a key interest rate, called the federal funds rate, by one-quarter percentage point to 3.50 percent, the highest in nearly four years. It marked the 10th quarter-point increase since the Fed began to tighten credit in June 2004.
Since the August meeting, energy prices have marched even higher. On Tuesday, oil prices shot up briefly over $70 a barrel.
Federal Reserve officials at the August meeting discussed the factors affecting prices. Although uncertainties complicated the inflation outlook, higher energy prices and a stronger job market ''were seen as pointing to elevated inflation pressures," the minutes said.
Economists believe the Fed will increase rates by another quarter point at its next meeting, Sept. 20, as well as the year's last two meetings in November and December. If that turns out to be true, the federal funds rate -- the interest banks charge each other on overnight loans -- would climb to 4.25 percent by the end of this year. That would push commercial banks' prime rate to 7.25 percent. That rate is used for many short-term consumer and business loans.
On the booming housing market, Fed policy-makers anticipated that the torrid pace of increases in prices ''would slow over time, though the timing and the extent of that slowing, as well as its implications for consumer spending were quite uncertain," the minutes said. Federal Reserve chairman Alan Greenspan on Saturday said the red-hot housing market will eventually cool down, making some people feel less wealthy and less inclined to be big spenders.