Fed feared inflation wouldn’t ebb, minutes show

Federal Reserve officials worried last month that inflation might not recede as hoped and that an inflationary psychology could set in, making their job tougher, according to meeting minutes released Wednesday.

“All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern,” minutes of the policy-setting Federal Open Market Committee’s Oct. 24-25 meeting said.

“Members noted that a significant amount of data would be published before the next committee meeting in December, giving the committee ample scope to refine its assessment of the economic outlook before judging whether any additional firming was needed to address those risks,” the minutes said.

Fed participants expressed concern that inflation expectations could drift upward if core inflation -- which excludes volatile fuel and energy costs -- remained elevated for a protracted period.

The Fed in October kept its benchmark overnight federal funds rate steady at 5.25% for the third meeting in a row, predicting that moderating economic growth would probably ease consumer price pressures.

The minutes conveyed not only the Fed’s concerns about the outlook for inflation, but also its expectations that core inflation would edge lower as economic growth slowed. The Fed also noted there was a danger that price rises could fail to ease.

Wednesday’s minutes reduced hopes that the Fed might start lowering rates soon.

“The main message was a little bit of a hawkish one,” said John Miller, head of fund management at Nuveen Investments in Chicago. “They wanted to remind that they still have a bias toward raising rates if inflation remains as high as it has been over the past 12 months.”

Fed officials were confident that the economy would expand at a rate close to or a little below its long-run potential and that any drag the slowdown in housing activity would have on growth would gradually wane.

The housing market slowdown and declines in house price gains were not translating to a slowdown in consumer spending, the Fed said.

“Many participants drew some comfort from the most recent data, which suggested that the correction in the housing market was likely to be no more severe than they had previously expected and that the risk of an even larger contraction in this sector had ebbed,” the minutes said.

Policymakers also discussed the merits of inflation targeting but thought the issue merited more deliberation. Fed Chairman Ben S. Bernanke believes that adopting an explicit target would help the central bank anchor inflation expectations.