Fed Was Eyeing Energy Prices’ Effect on Inflation

Federal Reserve policymakers were concerned about energy prices stoking broader inflation when they met in early May, and that underpinned their decision to raise short-term interest rates for an eighth time since mid-2004, according to the minutes of the meeting released Tuesday.

What’s more, although policymakers acknowledged that the economy had slowed, they didn’t expect the weakness to last.

The summary of the May 3 meeting pointed to more increases ahead for the Fed’s key rate, now at 3%, many analysts said. The Fed next meets June 29-30.

“Rates are definitely going higher.... The minutes support that,” said Richard Yamarone, economist at Argus Research Co. in New York.

“A discernible upcreep was apparent in survey measures of short- and, to a limited extent, long-term inflation expectations over recent months,” the minutes of the Federal Open Market Committee said.

Some members saw both the risks of inflation rising and of growth slowing, but the committee agreed overall that the risks were roughly equally balanced.

The minutes cited some signs of economic slowing but also the belief that they would be “transitory.”

Since the May 3 meeting, the government reported a net 274,000 jobs were created in April, retail sales that month were up a solid 1.4%, and a measure of core consumer inflation was unchanged.

The minutes said Fed members expected energy prices to ease, along with import prices, restraining inflation. “On balance, measures of core inflation were thought likely to remain in check over the remainder of this year and next,” they said.

Still, the minutes left no doubt that the Fed intended to keep raising borrowing costs, saying that “the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run.”

Fed members continued to debate how to plot the future course of rate increases and about whether they were signaling their intentions in a way that was useful for markets.

Some believed that increased uncertainty about inflation and the economy meant they should drop any forward-looking language from their post-gathering statements, “if not at this meeting, then fairly soon.”

Nonetheless, they agreed to retain forward-looking language and thought that saying they would move at a “measured” pace in raising rates -- which Wall Street has come to view as meaning a quarter-point increase at each meeting -- “would not stand in the way of either a pause or a step-up in policy firming depending on events.”

Economists’ estimates of how high the Fed’s key rate will go mostly range from 3.25% to 5%.