Fed Signals Greater Worry About Prices

Some Federal Reserve policy makers expressed deepening concerns about inflation at the central bank’s December meeting, and officials overall concluded that interest rates should continue to rise, according to minutes of the meeting released Tuesday.

The Federal Open Market Committee concluded that its key short-term rate “remained below the level it most likely would need to reach to keep inflation stable,” the minutes said.

Some members also expressed concerned about signs of “potentially excessive risk-taking” in financial and housing markets because of relatively low interest rates.

Tuesday’s release was the first time the Fed issued minutes with a three-week delay instead of six, giving investors more timely information on policy makers’ deliberations.

The Fed raised its benchmark short-term rate, the federal funds rate, a quarter-point to 2.25% on Dec. 14, the fifth such increase since June.

The minutes make several references to concerns unnamed officials had about inflationary pressures in the economy.

A weaker dollar, higher energy prices, diminishing competition in some industries and a possible slowdown in worker productivity were among the forces that could drive prices higher, the minutes said.

“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” unless interest rates go higher, the panel said.

“It’s more hawkish than I’ve heard them in a long time,” said Mark Spindel, a money manager at International Finance Corp. “There was a sense before that they might pause” in tightening credit. “I don’t think there’s that sense anymore.”

In its official statement after the December meeting, the Fed repeated that it expected to continue raising rates “at a pace that is likely to be measured.”

At the meeting, officials again debated whether to continue issuing forward-looking statements, the minutes showed.

“More of the members believed that this language was useful in conveying the committee’s sense of the outlook for the economy and the stance of monetary policy,” the minutes said.

But the report said some members believed the Fed’s flexibility in policy moves would be enhanced by eliminating forward-looking statements. That could imply some members believe the Fed might have to raise rates at a faster pace in 2005, analysts said.

More troubling to some experts was a reference to some Fed officials’ concerns about possible speculation in asset markets caused in part by an extended period of low short-term rates. The Fed kept its key rate at 1% from mid-2003 to mid-2004, the lowest since 1958.

“Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets,” the minutes said.

Such risk-taking might be evident in a pickup in new stock offerings, an upturn in corporate mergers, and “anecdotal reports that speculative demands were becoming apparent” in housing, the minutes said.

The report also referred to the “generally low level” of long-term interest rates -- a sign that Fed officials might want long-term rates to rise further to damp inflation pressures.

The Fed next meets Feb. 1 and 2.