New Minutes Show a More Fractured Fed

By Nell Henderson
Washington Post Staff Writer
Wednesday, August 30, 2006

The Federal Reserve, it became plain yesterday, is a house divided.

This month, the central bank's top policymaking committee decided to halt its long campaign of interest rate increases, betting that the economy will slow enough to cool down a worrisome level of inflation. That decision appeared to be nearly unanimous, supported by a 9 to 1 vote of the panel, known as the Federal Open Market Committee.

But the committee was more split than the lopsided vote indicated, according to minutes of the Aug. 8 meeting released yesterday.

Under the complicated logistics by which the Federal Reserve is governed, 17 committee members took part in the rate-setting meeting, but only 10 got to vote. The minutes show that many participants thought more interest rate increases might be needed to tame inflation -- suggesting that some of the seven people who did not vote might have opted for another rate bump if given a chance.

The dissenting voter, Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, wanted to raise interest rates higher, the minutes said.

And Lacker "obviously was not alone," said Mickey Levy, chief economist for Bank of America Corp. "These minutes suggest that the call to remain on hold was significantly closer than one dissent suggested."

All 17 committee members remained worried about inflation, noting that it has been higher than they prefer for more than two years and has accelerated this year, the minutes said.

But the policymakers were uncertain about whether the recent surge in inflation is a transitory, oil-related bulge that they can wait out or the beginning of a more stubborn rise in prices that might be stopped by only more aggressive credit tightening, according to the minutes, which summarize the discussions without identifying participants by name.

The minutes also underscore a debate within the group over the wisdom of allowing inflation to run for four years above many members' preferred range of 1 to 2 percent, as measured by a Commerce Department price index that excludes volatile food and energy items.

That measure shows that "core" inflation was 2.4 percent in the 12 months ended in June, and the Fed forecasts it to stay above 2 percent through next year. And revisions to data released just before the meeting surprised the Fed by showing that core prices rose faster than 2 percent a year in 2004 and 2005.

Some Fed policymakers, such as Chairman Ben S. Bernanke, believe it's all right to let inflation hover above that level for a while because it will probably drift lower over the next 18 months as the economy slows and energy prices flatten. They also worry that the Fed would have to raise interest rates much higher, choking the economy and throwing many people out of work, to force inflation down any sooner.

But other Fed policymakers are less patient, believing it's dangerous to let inflation linger so high for so long. For example, Michael H. Moskow, president of the Federal Reserve Bank of Chicago, has argued that inflation tends to get stuck at a certain rate and becomes harder to bring down because businesses and consumers get into the habit of expecting price and wage increases to continue.

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