- The Washington Times - Tuesday, October 11, 2005


The Federal Reserve disappointed financial markets by continuing to raise interest rates in September, and minutes of the deliberations released yesterday gave plenty of hints there will be more increases to come.

The Fed said in its minutes there was concern that forgoing a rate increase might mislead people into thinking it was overly worried about the economic impact of Hurricane Katrina. The Fed decided to lift the federal funds rate to a four-year high of 3.75 percent at its Sept. 20 meeting.

“A pause in policy tightening at this meeting had the potential to mislead the public both about the committee’s perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability,” according to the minutes.

Many market participants had predicted that the Fed would pause temporarily to give them time to gauge the economic impact from Katrina.

The minutes of the Sept. 20 closed-door discussions also revealed increased worries among Fed policy-makers about inflation because of a spike in the price of gasoline and other energy products after refinery shutdowns along the Gulf Coast.

The Fed talked about increased wage pressures in some industries, higher inflation expectations on the part of consumers and increased federal spending on rebuilding that the Fed said “underscored the worrisome loss of fiscal discipline evident in recent years.”

Because of all these inflation concerns, private economists said it was clear that the central bank planned to keep raising interest rates.

“It is onward and upward. There is nowhere else to think rates are going than higher,” said Richard Yamarone, chief economist at Argus Research in New York.

At the Sept. 20 meeting, the Fed boosted the federal funds rate, the rate that banks charge each other, to 3.75 percent. It was the 11th consecutive increase since the Fed gradually began raising the funds rate from a 46-year low of 1 percent in June 2004.

The September increase was approved on a 9-1 vote with Fed Governor Mark Olson dissenting. The minutes explained that Mr. Olson preferred a pause until the Fed had a better view of how severe the impact from Katrina would be on the U.S. economy.

Since the Fed meeting, a number of the members of the Federal Open Market Committee — the panel of Fed board members in Washington and regional Fed bank presidents that sets interest rates — have expressed concerns in various speeches that inflation pressures have increased because of the sharp spike in energy costs.

Analysts said the minutes provided support for their views that Federal Reserve Chairman Alan Greenspan is intent on raising rates at his final three meetings before ending his 18-year Fed career in January.

“Come hell or high water, Mr. Greenspan is going to keep tightening until he leaves. He has already proven that high water won’t stop him,” said David Wyss, chief economist at Standard & Poor’s in New York.

Mr. Greenspan’s final three meetings are on Nov. 1, Dec. 13 and Jan. 31. If the funds rate is increased at each of those meetings, it would be at 4.5 percent when Mr. Greenspan leaves office.

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