Fed Minutes Show Concern Over Inflation

Policymakers at the Federal Reserve (search) noted "a discernable upcreep" in inflation, but didn't believe they needed to raise short-term interest rates (search) more aggressively to keep prices in check, minutes from their May 3 meeting showed.

"Participants voiced concerns about recent price trends," minutes from the Federal Open Market Committee (search) meeting, which were issued on Tuesday, said. "They expected inflation to remain contained but also perceived that the risks to that inflation outlook now might be skewed somewhat to the upside." stick with their policy of gradually boosting interest rates to keep inflation and the economy on an even keel.

At the May meeting, the Fed raised rates by one-quarter percentage point to 3 percent. It marked the eighth rate increase of that size since the Fed began to tighten credit last June.

To signal that it had grown more concerned about inflation from its previous meeting on March 22, the Fed in May dropped language that had been in the March statement. The March language had noted that the rise in energy prices had not fed into "core" consumer prices, which track a broad range of prices except for energy and food costs.

The minutes left no doubt that the Fed intends to keep raising borrowing costs, specifying that "the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run."

"Rates are definitely going higher. That is for sure. The minutes support that," said Richard Yamarone, economist at Argus Research Corp.

Economist Patrick Fearon of A.G. Edwards and Sons Inc. in St. Louis, Mo., agreed, saying the U.S. central bank's rate-rise campaign has a way to run. "They feel as if they have some distance to go so the most likely prospect is for at least a couple more rate hikes," he said.

Some economists believe the Fed's key interest rate, now at 3 percent, could climb to 4 percent by the end of this year.

There were evidently growing doubts among the policy-makers about how to plot the future course of rate rises and about whether they were signaling their intentions in a way that was useful for financial markets.

"For many, heightened economic uncertainty in the current environment implied greater uncertainty about the range of possible policy outcomes and placed a premium on flexibility in setting policy at upcoming meetings," the minutes said.

Some felt that the increased uncertainty meant they should drop any forward-looking language from the statement they issue after FOMC gatherings, "if not at this meeting, then fairly soon," but they compromised.

All agreed to retain forward-looking language and felt that saying they would move at a "measured" pace "would not stand in the way of either a pause or a step-up in policy firming depending on events."

Reuters and the Associated Press contributed to this report.