Fed Officials Uncertain if Need to Boost Interest Rates

Senior Federal Reserve Board officials said Friday that although the economy doesn’t appear to be slowing as quickly as they had expected, they still aren’t sure whether the Fed will need to raise short-term interest rates this fall.

At this point, the prevailing mood among top Fed officials seems to be uncertainty about just where the economy is headed for the rest of the year. Because of recent reports of buoyant economic growth, they are more concerned than they were a few weeks ago that they may have to raise rates--but they are not yet convinced it’s necessary.

“Growth has got to slow down” from the 4.8% annual rate of the second quarter, said one of the officials, who is concerned that inflation would worsen if it does not. “I had thought it was slowing, but now I’m not so sure.”

None of the officials, here for a Kansas City Federal Reserve Bank conference on how to achieve price stability, would comment on the record.

Should Fed policymakers decide to act, many analysts expect it would be to raise the current 5.25% target for overnight interest rates by only a quarter of a percentage point. The current target is well above the inflation rate, and many Fed officials believe it’s having the effect of restraining growth rather than stimulating it.

The only member of the Fed board not here, Lawrence B. Lindsey, echoed publicly in an interview on the CNBC television network on Friday what his colleagues were saying privately: The economy may be on the verge of overheating.

“This is the focus of my attention,” Lindsey said.

Lindsey described the recent economic data as “mixed” but “flashing yellow.”

It will be a “tough call” whether to raise short-term interest rates at the Fed’s next policymaking session Sept. 24, he said.

A key issue for the Fed, some of the central bank officials said, is whether the pace of economic growth is so strong that it will add to inflationary pressures. There are relatively few signs that it is, but the officials are worried about that risk.

With investors and analysts sharing the Fed officials’ concern about the near-term outlook, long-term interest rates jumped again Friday, with yields on 30-year U.S. Treasury bonds rising to 7.12%, up from 6.94% at the beginning of the week. And the stock market fell again Friday, with the Dow Jones industrial average dropping 31.44 points to close at 5616.21.

The market’s jitters this week were due partly to an upward revision in the growth rate for inflation-adjusted gross domestic product in the April-June period to 4.8% from 4.2%--well above the 2% to 2.5% pace the Fed is seeking. Strong sales of new homes in July--despite higher mortgage interest rates--also were a factor.

However, both the rise in interest rates and the officials’ uncertainty also are based partly on expectations that the Labor Department’s August employment report, due out next Friday, will show an increase of 250,000 to 300,000 in the number of payroll jobs, and a rebound in the length of the average workweek from a drop last month.