Rates Rose on Inflation Fears
Wednesday, November 23, 2005
Worried that high energy costs could feed into other prices and spread inflation throughout the economy, Federal Reserve policymakers in November felt the need to keep pushing interest rates higher.
Minutes of the Fed's closed-door meeting on Nov. 1, released yesterday, underscored that policymakers were more concerned about the prospects of resurgent inflation than a serious slowdown from the three deadly hurricanes that ravaged the Gulf Coast.
Even though energy prices, which surged to record highs after Hurricane Katrina struck in late August, had moderated by then, "upside risks to the outlook for underlying inflation remained a key concern," according to the minutes.
"A number of firms had been reporting a greater ability to pass through increases in energy and other costs to customers, though evidently more so to other businesses than to consumers," the minutes said.
To fend off inflation, the Fed at the November meeting raised its key short-term rate, called the federal funds rate, by a quarter-percentage point to 4 percent, the highest level in more than four years. It marked the 12th increase of that size since the Fed began to tighten credit in June 2004.
Analysts expect the Fed to increase rates again at its next meeting, Dec. 13, the last scheduled Fed meeting of this year. Still, rate decisions would be "increasingly sensitive to incoming economic data," the minutes said. "Some members cautioned that risks of going too far with the tightening process could also eventually emerge."
The federal funds rate, which is the interest that banks charge each other on overnight loans, influences a variety of other interest rates, including banks' prime lending rate used for consumer and business loans.
According to the minutes, policymakers were confident that the economy was weathering the blow of the storms well.
"The economy seemed to be growing at a fairly strong pace, despite the temporary disruptions associated with the hurricanes," the Fed document said.
The minutes said that all Fed policymakers believed that it was important to keep raising rates "to check upside risks to inflation."
On the housing market, a slowing in house price gains in some areas and recent declines in home equity lending at banks "could be indicating that the long-expected cooling in the housing market was near," the minutes said.