Fed Saw Need for More Rate Hikes to Tame Inflation, Minutes Show

Federal Reserve policymakers believed that more interest-rate increases would be needed to keep inflation tamped down when they nudged credit costs up three weeks ago, according to minutes of the meeting released Tuesday.

“Even after today’s action, the federal funds rate would likely be below the level that would be necessary to contain inflationary pressures, and further rate increases probably would be required,” the minutes said.

The policy-setting Federal Open Market Committee raised the overnight borrowing rate by a quarter-percentage point Sept. 20, taking it to 3.75%. It was the 11th consecutive quarter-point hike in a string dating to June 2004, when rates stood at a 1958 low of 1%.

Fed Gov. Mark W. Olson dissented from the September decision -- the first dissenting vote since June 2003. The minutes said Olson preferred to hold rates steady and await further data on how Hurricane Katrina, which hit the Gulf Coast in August, would affect the economy.

But the minutes showed officials worried that a surge in energy prices in Katrina’s wake had raised inflation risks and believed that the U.S. economy would soon regain its feet after the devastating storm -- sentiments that have been echoed publicly by a number of policymakers since the 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,” the minutes said.

The minutes showed officials were concerned about a “worrisome loss of fiscal discipline” in Washington and the possibility that federal spending on post-hurricane reconstruction efforts could give the economy an unneeded boost and increase price pressures.

The minutes said surging energy prices probably would push up inflation, even outside the volatile food and energy area, for a time and could prove a more persistent influence if expectations of higher inflation became ingrained.

According to the minutes, “some sentiment” was expressed that changes to the Fed’s post-meeting statement might be warranted in the future, partly because of the “considerable reduction” in the degree to which interest rates were boosting the economy.

In its post-meeting statement Sept. 20, the Fed reiterated its view that “policy accommodation can be removed at a pace that is likely to be measured.” The minutes suggested there had been some discussion about the need to eventually alter that forward-looking language.