Fed Meeting Minutes Show Leaders Had Divergent Outlooks on Economy

By Neil Irwin
Washington Post Staff Writer
Thursday, October 15, 2009

There were simmering disagreements among top Federal Reserve officials at their last policymaking meeting, according to minutes released Wednesday, as central bankers who were largely unified during the past year diverged in their views on the risks of inflation.

The final vote was unanimous at the Sept. 22-23 meeting of the Federal Open Market Committee, as the Fed decided to keep its target interest rate near zero and to wind down by March a program that buys mortgage-backed securities. But the minutes, combined with recent speeches by Fed leaders, make clear that some senior officials are starting to stake different positions on how soon the central bank should withdraw its aggressive steps to support the economy.

One crucial question is whether the slack in the economy -- idle resources such as unemployed workers and underused machines -- will prevent inflation from taking off in the coming months and years. Fed leaders including Chairman Ben S. Bernanke and Vice Chairman Donald L. Kohn have suggested just that in their speeches.

But, the minutes say, "some participants were skeptical of the usefulness of measures of resource utilization in gauging inflation pressures, partly because of the difficulty of measuring slack" and that the "degree to which slack reduces inflation depends on the stability of longer-term inflation expectations." In other words, it's hard to know just how much extra productive capacity there is in the economy, and if people fear that the Fed is insufficiently vigilant, inflation could take off even when the unemployment rate is still high.

"If they start to see businesses and consumers price in views of higher inflation, that can get passed through to the economy even in an environment where you have a lot of slack," said Michelle Meyer, U.S. economist at Barclays Capital.

There also was disagreement on the decision to wind down the $1.25 trillion program that buys mortgage-backed securities. "Some members thought that an increase in the maximum amount" of such purchases "could help reduce economic slack more quickly." Another member, who was not named, favored ending the program more quickly.

Since the financial crisis deepened just over a year ago, there has been little public disagreement among Fed leaders. That has changed in recent weeks, with several officials giving speeches staking out differing views on the likely strength of the economic recovery and their preferred course for Fed policy.

In general, "inflation hawks" such as Richmond Fed President Jeffrey Lacker, Philadelphia Fed President Charles I. Plosser and Kansas City Fed President Thomas Hoenig argue that the central bank will need to move aggressively to prevent inflation from kicking in, raising interest rates even while the economy is still quite weak.

"It's clear they feel like the institution's credibility is on the line," said Michael Feroli, an economist at J.P. Morgan Chase.

Meanwhile, those who are more worried about growth, such as New York Fed President William C. Dudley and San Francisco Fed President Janet Yellen, argue that with the economy very weak and credit still limited, the central bank must continue acting aggressively to try to bolster the economy.

© 2009 The Washington Post Company