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Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.Signaling a more hawkish stance toward inflation, the Federal Reserve expects to raise interest rates higher than it previously believed necessary and possibly at a faster pace, minutes to its March 22 policy meeting suggest.
Fed officials cited evidence of increased inflation pressure and a more durable economic expansion. As a result, "the required amount of cumulative tightening [of monetary policy] may have increased," the minutes, released yesterday, said.
Stock and bond investors had worried the minutes might point to an even more aggressive stance on the part of the Fed, and markets reacted with relief. The Dow Jones Industrial Average, in negative territory prior to the Fed minutes' release, ended the day up 59.41 points at 10507.97. The 10-year Treasury-bond yield, which moves in the opposite direction to its price, fell to 4.364%, a one-month low, from 4.434%.
At last month's meeting, the Fed raised its target for the federal- funds rate, charged on overnight loans between banks, to 2.75% from 2.5%. In an accompanying statement it also said, as it had after each meeting since May, that it could continue to raise rates at a "measured" pace. "Measured" has come to mean by no more than a quarter percentage point a meeting. The statement also cited concern over inflation pressure.
At their meeting, the 12 voting members of the 19-member Federal Open Market Committee said that an "accelerated" pace of tightening -- a switch from quarter-percentage-point to half-percentage-point moves or larger -- "did not appear necessary at this time."
But some members pushed to drop the "measured" pace language because it could "constrain future policy action inappropriately; while these concerns were not new, they were now felt to be more pressing, as the odds that the committee might need to step up the pace of policy firming were thought to have increased."
The majority, however, argued that "measured" was clearly contingent on the economy's using up spare capacity gradually and inflation's remaining low, and "did not rule out" either raising rates more rapidly, or pausing in the rate increases, if necessary.
Officials also said that the economy had "appreciably more forward momentum than previously perceived and that inflation pressures could be intensifying." Business investment was quite strong, "perhaps partly in response to unusually supportive financial conditions," that is, easy credit, a lower dollar and rising stock prices.
Those views may have weakened over the past three weeks. Economic growth shows signs of cooling: Job growth was subpar in March, and higher oil prices appear to have sapped consumer confidence. Yesterday, a widening trade deficit prompted some economists to mark down estimates of first-quarter growth.
The minutes reinforce other signals the Fed thinks it will need to raise rates further than it previously thought, though it isn't sure just how much further. In February, Fed Chairman Alan Greenspan told Congress the low level of Treasury-bond yields, then 4.1%, was a "conundrum," implying the markets were too sanguine about how far short-term rates were likely to rise.
In their March discussion, Fed officials were concerned about recent high readings on consumer, producer and oil prices and more pervasive anecdotes about the ability of businesses to raise prices. But they also cited the likelihood that commodity and energy prices would ease, profit margins were wide enough to absorb costs without resorting to higher prices, and productivity growth remained strong. "Still, many participants indicated their uncertainty about the intensity of inflation pressures had risen in response to recent developments and that in particular, the distribution of possible inflation outcomes was now tilted a little to the upside." Some members pressed to discard the so-called balance of risks from the postmeeting statement, which says whether the Fed thinks inflation or economic growth will likely be higher or lower than desired in coming quarters. Some officials said it was "too rigid to reflect evolving circumstances."
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