Fed Minutes Show Debate on Interest Rates

Federal Reserve (search) policy-makers, concerned about inflation, debated last month whether to signal the possibility that they might move more aggressively to raise interest rates, according to minutes of their March meeting released Tuesday.

Specifically, the policy-makers discussed whether they should at some point abandon their stance of only gradually raising short-term interest rates. In the end, they decided to stay with that approach — for now.

Fed Chairman Alan Greenspan (search) and his colleagues at the March 22 meeting boosted short-term interest rates (search) by one-quarter percentage point, the seventh increase of that size since the Fed began its credit tightening campaign last June.

Even though the Fed took a much more hawkish tone about the possibility of an inflation flare-up, it still stuck with language in its post-meeting statement that future rate increases could be at a pace "that is likely to be measured." Economists have come to view measured as one-quarter percentage point increases.

Policy-makers, at the March meeting, discussed the pros and cons of maintaining this stance, the minutes revealed.

"Some expressed the view that such language could constrain future policy inappropriately; while these concerns were not new, they were now felt to be more pressing, as the odds that the committee might need to step up the pace of policy firming were thought to have increased," the Fed minutes said.

Most members, however, believed the "measured" language was clearly conditional on how the economy and inflation unfolded. Thus, they believed the wording didn't rule out either speeding up the Fed's rate-raising campaign or taking a pause, if economic conditions warranted, the Fed minutes said.

The Fed has been using the "measured" language throughout its current credit tightening campaign.

While various viewpoints were expressed about the "measured" stance, the minutes revealed that Fed policy-makers sensed a need for possible change down the road.

"Members recognized that the committee's statement would need to evolve over time," the minutes said.

Private economists believe it's just a matter of time before the Fed adjusts. Some believe it could jettison the language as early as its next meeting on May 3. Others think the language will be dropped later this year.

Economists believe the Fed is trying to prepare Wall Street and Main Street for a credit tightening campaign that may last longer — perhaps well into 2006 — than some previously thought.

"I think `measured' may still be on its way out. But it may have a little more shelf life left at the Fed," said Stuart Hoffman, chief economist at PNC Financial Services Group. Hoffman is predicting another quarter-point rate increase at the May meeting.

Even if the Fed were to drop its measured wording, Hoffman and others don't believe that necessarily would mean a bolder, half-percentage point boost would automatically be in the cards. Hoffman says there would need to be very strong signs of inflation worsening for the Fed to order bigger rate increases.

Fed members, at the March meeting, expressed concern that rising energy prices could stoke broader inflation. They also noted that some companies were finding it easier to raise prices. "The distribution of possible inflation outcomes was now tilted a little to the upside," the minutes said.