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Inflation Worried Fed

But March Meeting Concluded Rates Could Rise Slowly

By Nell Henderson
Washington Post Staff Writer
Wednesday, April 13, 2005; Page E03

Federal Reserve officials had become more concerned about rising price pressures by the time of their last policymaking meeting three weeks ago, but they did not think they would have to pick up the pace of interest rate increases to restrain inflation.

The policymakers generally thought that "inflation would most likely continue to be contained," allowing them to continue raising the Fed's benchmark short-term rate in small steps over many months, according to minutes of their March 22 meeting released yesterday.

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Stocks rose and Treasury yields fell yesterday after the minutes were released, easing some worries in financial markets that the Fed was preparing to increase rates more aggressively.

The Federal Open Market Committee agreed at the March meeting to raise the benchmark short-term interest rate to 2.75 percent from 2.50 percent, the seventh quarter-percentage-point increase since June. The group also said in a written statement after the meeting that it was likely to keep to that "measured" pace.

But the March statement rattled the markets by noting higher inflation pressures and a growing ability of some businesses to raise prices. Some analysts interpreted that language as a warning that the rate might rise more sharply, perhaps in half-percentage-point steps, in the near future.

The committee members noted that the U.S. economy had gained steam over the winter and concluded that they might have to raise the rate higher over time than they had expected. But they but did not think they had to move faster, the minutes show.

"Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time," said the minutes, which summarize the discussion of the 19 committee members without identifying speakers by name.

In December, private economists generally predicted that the Fed would raise the benchmark federal funds rate, the rate charged between banks on overnight loans, to somewhere between 3 and 4 percent by the end of this year. Now they expect the rate to be at least 4 percent by year-end.

The Fed officials were concerned about inflationary pressures for a variety of reasons, including the recent surge in energy prices. By the time they met in March, oil traded around $56 a barrel. The national average price for regular gasoline had reached $2.10 a gallon and appeared headed higher.

The economy also was apparently growing more rapidly than expected, propelled by strong consumer and business spending. And so-called core consumer prices, which exclude those of food and energy, had risen 0.3 percent in January, a slight increase from previous months, according to a Commerce Department measure preferred by the Fed.

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