Fed members cite inflation as top concern

Federal Reserve officials agreed at their December meeting that inflation was the predominant concern, but some believed the “subdued tone” of economic data meant risks to growth had increased, according to minutes of the meeting released Wednesday.

Also Wednesday, new reports indicated that manufacturing rebounded in December after a contraction in November and that construction spending fell less than expected in November. A separate report said private-sector employment fell in December, the first time in three years.

The minutes of the Fed’s Dec. 12 meeting said several officials “judged that the subdued tone of some incoming indicators meant that the downside risks to economic growth in the near term had increased a little and become a bit more broadly based than previously thought.”

But some analysts said little weight should be attached to the minutes because they had been overtaken by recent data pointing to a resilient economy.

“This Fed meeting was held before the spate of reports, starting with retail sales in the middle of December, that showed the economy looking more resilient,” said Cary Leahey, managing director at Decision Economics in New York.

Earlier Wednesday, the Institute for Supply Management said its index of national factory activity climbed to 51.4 in December from 49.5 in November -- above the 50 threshold that separates growth from contraction. Analysts had forecast a reading of 49.9.

Analysts were also encouraged by the decline in the institute’s prices-paid index, which measures inflation pressures at the industrial level. The index fell to 47.5 from 53.5, while a measure of new orders climbed to 52.1 from 48.7.

The data were seen as further confirmation that the Fed would probably hold interest rates unchanged well into the first half of this year.

The central bank raised its target for the federal funds rate 17 times from June 2004 to June 2006, ending at 5.25%. Analysts expect it to start easing monetary policy this year. The next policy-setting meeting for the Fed is scheduled for the end of the month.

Construction spending also pointed to a resilient economy. Spending fell 0.2% in November to a seasonally adjusted annual rate of $1.18 trillion, led by an eighth straight drop in private residential building, which more than offset record highs in nonresidential and public construction.

More current data showed some resilience in the U.S. housing market. Mortgage applications rose last week, led by demand for home purchase loans even as interest rates climbed for a fourth consecutive week, an industry trade group said.

The Mortgage Bankers Assn. said its seasonally adjusted index of mortgage application activity, which includes refinance and purchase loans, rose 3.6% last week.

But some analysts were cautious on the economy and pointed to a report that showed U.S. private-sector employment contracted in December for the first time since April 2003.

The monthly ADP National Employment Report showed private-sector employers shed 40,000 jobs after adding 158,000 jobs in November. The report is based on payroll data and measures the change in total private-sector nonfarm employment each month.

The ADP report hinted the government’s closely watched nonfarm payroll report for December, due Friday, might prove soft.