WASHINGTON – Some Federal Reserve officials last month raised the possibility of scaling back the Fed's $600 billion Treasury bond purchase program out of fear that a strengthening economy could spur high inflation.
The minutes from the Fed's Jan. 25-26 meeting were released on the same day that the government reported that a measure of wholesale inflation rose in January at its fastest pace in more than two years.
Still, Fed officials unanimously concluded at the policy meeting that inflation wasn't a problem yet, and decided to stick with the pace and size of the bond-buying program. The bond purchases are intended to invigorate the economy by getting Americans to spend more.
The central bank also raised its forecast for economic growth for this year. The fear among some critics of the bond-buying program is that as consumers and businesses spend more, prices will rise at an unhealthy pace.
Minutes of the closed-door meeting released Wednesday showed that a few members said it might be appropriate to reduce the size of the program or slow it down if economic data point to "a sufficiently strong recovery." The minutes never identify members.
The Fed expects the economy to grow between 3.4 percent and 3.9 percent this year. That's up from its November forecast of between 3 percent and 3.6 percent.
Even so, economic growth still isn't strong enough to quickly lower the unemployment rate, which is 9 percent.
The Fed foresees the unemployment rate hovering around 9 percent this year and falling as low as 7.6 percent next year, when President Barack Obama seeks re-election. Normal unemployment is closer to 6 percent.
The Fed projects inflation won't exceed 1.7 percent this year, sticking with the high end of its range from the previous meeting.
Higher prices for energy and other commodities have boosted inflation recently, but most Fed members continue to believe that inflation will remain low. Fed officials debated whether they were looking at all the right barometers for catching inflationary trends.
Fed Chairman Ben Bernanke has argued that "slack" in the economy will help keep inflation at bay. Factories and companies are still operating well below full capacity, and workers lack bargaining power to demand higher pay in the slowly healing job market.
But others are skeptical of that method for measuring inflation.
Some members also raised concerns that businesses might suddenly increase retail prices "substantially" when the economy gains more momentum. For the most part, companies have had only a limited ability to jack up prices to consumers to cover higher costs for fuel and raw materials. That's helped to keep inflation at the consumer level low.
"The factors affecting the ability of businesses to pass through higher prices to consumers were viewed as complex and hard to monitor in real time," the Fed minutes acknowledged.
Any hint of high inflation will likely prompt Fed members to pressure Bernanke to cut off the program before June 30, when it is scheduled to end. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, have expressed concerns that it could trigger inflation.
The Fed's show of unity seen at the January meeting could disappear by spring. The Fed may signal at its March 15 meeting whether it will end the program on schedule or extend it. Any push to renew the program would likely face stiffer resistance given the improving economy.
Many economists predict the Fed won't renew the program. And most of them think the Fed will spend the full $600 billion on the program. "Nothing in the minutes suggests the Fed will not complete its current . program, though it is equally unlikely to extend the asset purchases," said economist Sal Guatieri at BMO Capital Markets.
The minutes also showed that a few members were "unsure" of the program's impact on the economy but didn't feel comfortable making changes to the program at the January meeting.