The Federal Reserve vote on Nov. 16 to raise short-term interest rates by a quarter of a percentage point--for the third time in five months--was unanimous, but officials were divided on whether those moves would be enough to slow torrid economic growth and keep inflation under control, according to minutes of the meeting released yesterday.
Many analysts and financial market participants are expecting the Fed to raise rates again at the next meeting of the Federal Open Market Committee at the beginning of February. Some say if it doesn't happen then, it will at the following meeting in March.
The FOMC left rates unchanged on Tuesday because of concerns about the possible effect on financial markets from any action on rates.
The November minutes said, "On the basis of currently available information, a number of members [of the FOMC] indicated that they were quite uncertain about the possible need for further tightening action over coming months to keep inflation within acceptable limits."
"Other members, emphasizing the persistently strong growth in economic activity and the unusually high level of labor resource utilization, suggested that additional firming of the stance of policy probably would be necessary to keep inflation in check . . . ," the minutes said.
The key worry of most of the FOMC participants is that rapid economic growth will continue to drive down the nation's very low 4.1 percent unemployment rate, causing wages to rise more quickly as employers struggle to find needed workers, with those added costs pushing up inflation.
"In general, however, the members anticipated that any pickup in inflation was likely to be gradual, with cost pressures quite possibly continuing to be held largely in check for some time by improving productivity trends," the minutes continued. "They recognized that forecasts of rising inflation had failed to materialize in recent years, raising questions about their understanding of the . . . relationships that currently underlie the inflation process."
Nevertheless, most of the members regarded current growth rates as unsustainable--the Commerce Department this week revised upward its estimate of third-quarter growth to a 5.7 percent inflation-adjusted annual rate--suggesting "a significant risk that inflation would strengthen over time given prevailing financial conditions."
One reason for raising rates in November, the minutes said, was the understanding that it would not be wise to raise them at the subsequent meeting--the one this week--because it would be so close to year-end. "Accordingly, any action might have to wait until the meeting in early February, and the members agreed that the risks of waiting for such an extended period were unacceptably high," the minutes said.
After this week's meeting, the FOMC issued a statement saying that in February "the committee will assess available information on the likely balance of supply and demand, conditions in financial markets and the possible need for adjustment in the stance of policy to contain inflationary pressures"--that is, the possible need to raise rates again.
The most important pieces of information are likely to be whether the nation's pool of unemployed people is continuing to shrink and whether there are any signs that inflation is beginning to increase. The pace of economic growth currently is a less important indicator for some Fed officials because rapid increases in productivity--the amount of goods and services produced for each hour worked--mean that growth can be higher than in the past without putting a further squeeze on the country's very tight labor markets.