Inflation topped Fed worries

Federal Reserve policymakers were unanimous in the view last month that inflation, not economic weakness, was their major worry.

Minutes of their private discussions released Wednesday showed that Fed Chairman Ben S. Bernanke and his colleagues even discussed the possibility that future increases in interest rates might be needed to combat inflation.

The Fed kept rates unchanged at the conclusion of their discussions March 21. But policymakers changed the wording of their statement in such a way that financial markets believed the Fed might lower rates in the future if the economy weakened further.

However, Bernanke later told Congress that the Fed had not changed its view, which was tilted toward greater worry about inflation. According to the minutes, “the committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.”

The minutes also stated that “the committee agreed that further policy firming might prove necessary to foster lower inflation.” But Fed officials believed that given the increased uncertainty about economic growth, “the statement should no longer cite only the possibility of further firming.”

Policymakers acknowledged in the minutes that they were concerned about “surprisingly weak” business spending and rising delinquencies on sub-prime mortgages.

Some economists saw the March 21 statement and the newly disclosed discussion as evidence that the Fed was having trouble communicating its intentions to financial markets.

“This is the most inconsistent piece of communication we have seen under the new Fed chairman,” said David Jones, head of DMJ Advisors, a private consulting firm. “I think there is a big fight going on inside the Fed between officials who are more worried about inflation and those more concerned about growth.”

Other analysts said the minutes of the Federal Open Market Committee showed a central bank buffeted by the opposing forces of inflation and weaker growth.

The Fed meets next on May 9. Most economists expect the Fed to leave its key short-term rate unchanged at 5.25%. The Fed last raised rates in June 2006.