Inflation Troubled Fed Last Month

Federal Reserve officials were concerned about inflation when they met in September and worried that their credibility could come under attack if inflation did not ease as they hoped.

Although Fed policymakers decided at their Sept. 20 meeting to hold interest rates steady for a second straight time, minutes of the gathering released Wednesday made plain the degree to which they remained focused on inflation risks.

“Recent rates of core inflation, if they persisted, were seen as higher than consistent with price stability, and participants underscored the importance of ensuring a moderation in inflation,” the minutes of the rate-setting Federal Open Market Committee meeting said.

Although policymakers noted some signs of moderation in inflation since spring, they believed that it was important to maintain credibility in the fight to keep inflation in check.

“Several participants worried that inflation expectations could rise and the Federal Reserve’s willingness to carry through on its intention to seek price stability could be called into question if cost and price pressures mounted or even if there was no moderation in core inflation,” the minutes said.

The notes were released after two Fed officials offered upbeat assessments on the outlook for economic growth, saying they did not believe that the expansion would be derailed by a softening housing market.

Richmond Federal Reserve Bank President Jeffrey Lacker said the outlook for consumer and business spending was robust, and said the central bank must be “quite vigilant” on inflation.

Lacker took the unusual step of dissenting at the September meeting, as he did at the previous gathering Aug. 8, arguing that higher borrowing costs were needed to bring inflation down more quickly.

Speaking in London, Fed Board Gov. Susan Bies called the U.S. housing market adjustment orderly and said any changes would be absorbed by the favorable capital and earnings positions of banks.

Economists and investors viewed the minutes as suggesting a smaller likelihood than some had bet that the Fed would lower borrowing costs in coming months.

“This indicates to people who were thinking that maybe the Fed might be cutting interest rates sometime this year or early next year, that’s not likely to happen,” said Nigel Gault, director of U.S. economic research for Global Insight in New York.

After a string of 17 rate hikes stretching over more than two years, the Fed in August held its benchmark interest rate steady at 5.25%. It extended that rate pause in September.

The next meeting of Fed policymakers is scheduled for Oct. 24-25.