- The Washington Times - Tuesday, January 4, 2005


Federal Reserve policy-makers plan to keep pushing interest rates higher to blunt the risk of an inflation flare-up, according to minutes of the Fed’s December meeting released yesterday.

At the Dec. 14 meeting, policy-makers boosted the federal funds rate by one-quarter percentage point, marking the fifth increase in the key rate in 2004. The funds rate is the interest that banks charge each other on overnight loans and is the Fed’s main lever for influencing economic activity.

Even with that action, the Fed suggested the funds rate was still too low and needed to be moved higher to keep inflation and the economy on an even keel.

“With the economic expansion more firmly entrenched, cost and price pressures were likely to become a clearer, intermediate-term risk to sustained good economic performance,” the minutes said.

Economists predict interest rates probably will rise by another quarter point when the Fed meets next on Feb. 1-2.

“The message in the Fed minutes is clear — more Fed tightening to come,” said Stuart Hoffman, chief economist at PNC Financial Services Group. Mr. Hoffman and other economists think the Fed probably will continue on a path of modest rate increases in the future.

But financial investors appeared to be interpreting the Fed’s comments in the minutes as a signal of bolder rate increases, economists said.

“The markets are starting to fear a more aggressive Fed in 2005,” said Richard Yamarone, economist at Argus Research.

Before the Fed embarked on its rate-raising campaign in June 2004, the funds rate had been held at 1 percent, a 46-year low. Extra-low rates helped the economy recover from the 2001 recession.

Some Fed policy-makers said the long period of an extraordinarily low funds rate “might be contributing to signs of potentially excessive risk-taking in financial markets.”

They cited “a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums.”

Fed members agreed to keep a pledge that future rate increases probably would be gradual. A few questioned the need to retain the language.

Policy-makers also decided to speed up the release of minutes after their meetings. They suggested this might provide investors a bit more insight about the future course of interest-rate policy.

The action means that the minutes will be released three weeks after each meeting, versus a six-week lag.

Members said the minutes contained “a more complete and nuanced explanation of the reasons for the committee’s decisions and view of the risks to the outlook than was possible in the post-meeting announcement, and their earlier release would help markets interpret economic developments and predict the course of interest rates.”

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