Fed’s Minutes Leave Room for Rate Hikes

Federal Reserve officials agreed that a 14th straight increase in interest rates last month put borrowing costs near where they needed to be, but they would not rule out more hikes, given inflation risks.

“Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance,” minutes from the Fed’s Jan. 31 policy-setting meeting, released Tuesday, said.

The minutes of the Federal Open Market Committee said some officials believed readings on core inflation and inflation expectations that were “somewhat” higher than desired reinforced the idea that further rate rises might be necessary.

“However, all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence,” the minutes said.

Meeting on Alan Greenspan’s final day as chairman of the central bank, Fed officials pushed the overnight federal funds rate up by a quarter of a percentage point to 4.5%, the latest in a string of increases dating to June 2004.

As they had at their previous meeting in mid-December, policymakers saw inflation risks stemming from the possibility that high energy costs might bleed through to other prices and from a diminishing amount of slack in the economy.

Financial markets are banking on another quarter-point rate increase at the Fed’s next meeting March 27 and 28 and see a good chance of one more by midyear.

“If the economy slows down, more hikes would not be necessary. But right now, there should be an assumption that the Fed would push rates toward 5%,” said Charles Lieberman, chief investment officer at Advisors Capital Management in Paramus, N.J.

The Jan. 31 minutes said some members believed the economy was running close to its noninflationary capacity, a view underscored by new Fed chief Ben S. Bernanke in congressional testimony last week.

A few days after the Fed met, the government said the U.S. unemployment rate fell to a 4 1/2 -year low of 4.7% in January, leading financial markets to increase bets on further rate rises.

The Fed minutes showed that policymakers had been debating whether the jobless rate, which stood at 4.9% in December, signaled full employment, beyond which wage-related inflation pressures would ignite.

“Some participants remarked on the uncertainties regarding the extent of remaining capacity in labor markets and the outlook for labor costs,” they said.

The minutes said officials would watch closely to see whether more people came into the labor market, easing tight conditions, and whether productivity advances were great enough to keep rising wages from spilling over into prices.

Officials saw high profit margins both as a possible sign of the ability of businesses to pass production costs along to consumers and as a potential anti-inflationary buffer that could absorb future cost increases.

Fed officials believed that the economy would bounce back smartly in the current quarter after a sluggish end to last year. But they expected the expansion to maintain a more sustainable pace over the next couple of years.

Though they saw core inflation, which strips out volatile food and energy prices, as rising in the near term, they expected it to remain contained over the long haul.