Fed doesn’t see inflation as an immediate threat

Despite expressing more confidence in the prospects for continuing economic recovery, Federal Reserve policymakers gave little indication in their most recent meeting that they see inflation as an imminent problem or plan to raise short-term interest rates any time soon.

But the Fed’s interest rate-setting committee, in the minutes of its March 16 meeting that were released Tuesday, also suggested that they could quickly shift course.

For the last year, Chairman Ben S. Bernanke and his colleagues at the central bank have repeatedly indicated that they would keep the benchmark rates at near zero for an “extended period” -- words that have been commonly interpreted by markets and analysts to mean several months.

But the committee sought to throw cold water on that assumption, with the minutes indicating that a “number of members” noted that “extended period” doesn’t imply a fixed period of time.


Instead, the minutes said, the phrase meant that policy would be “explicitly contingent on the evolution of the economy.”

The committee’s comments may be seen as a bow to some Fed members -- and to conservative economists generally -- who have become increasingly worried about the threat of inflation, in large part because of the Fed’s prolonged policy of keeping interest rates near zero and its injection of cash into the financial system to prop up the economy.

Some Fed watchers viewed the comments as a signal that policymakers were preparing to remove the language “extended period” in their next meeting this month.

“It seems like a veiled warning to me,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.


Still, most analysts don’t see the Fed nudging up rates until later this fall at the earliest. And the minutes make clear that some Fed policymakers don’t see an immediate threat of inflation and are more concerned about the opposite -- deflation.

Members such as Janet Yellen, the president of the San Francisco Fed who is being considered for the Fed’s vice chairman post, have said in separate remarks that high unemployment and excess capacity in the economy mean more downward pressures on wages and prices.

And in their March meeting, a number of Fed officials concluded that “the risks of an early start to policy tightening exceeded those associated with a later start.”

The minutes revealed Fed policymakers’ concerns about the economy on several fronts. Despite a pickup in consumer spending and business investment for equipment, officials took note of the sluggish housing market and the persistent weakness on the labor front.

The Fed has traditionally not raised interest rates until the jobless rate peaked and started downward.

Its last meeting, however, was before Friday’s encouraging report showing the economy generated 162,000 jobs in March, the most in three years.

The unemployment rate last month remained at 9.7% -- and Fed officials generally don’t see the rate dropping much this year.

“I would be surprised if unemployment were below 9% by the end of 2010 or below 8% by the end of 2011,” said Narayana Kocherlakota, president of the Minneapolis Fed, in a speech Tuesday in Bloomington, Minn.