Federal Reserve officials disagreed at their last meeting about how much higher short-term interest rates would have to go to keep the lid on inflation, according to minutes of the discussion released yesterday.
Members of the Fed's top policymaking committee agreed that they could put off resolving the matter for the time being, the minutes of their June 29-30 meeting show. But the debate had clearly begun.
"Additional tightening would probably be necessary, but views differed on the amount of tightening that would likely be required," said the minutes, which summarize discussion without identifying the participants by name or describing the range of conflicting views on a subject.
The question of when the central bank might stop raising its benchmark short-term interest rate has loomed since Fed policymakers started lifting the rate last year from a four-decade low of 1 percent.
The Federal Open Market Committee members raised the federal funds rate -- the overnight interest charged between banks -- steadily over the past year and to 3.25 percent at that last meeting. They indicated after the meeting that they would keep nudging it up in the months ahead, a message reinforced by Fed Chairman Alan Greenspan in two days of testimony to Congress this week.
After Greenspan's remarks, many analysts predicted that the Fed would stop after raising the funds rate to around 4 percent by year-end. Greenspan, however, gave no indication of how high the rate will go. His comments did suggest, though, that the stopping point may be higher than analysts think.
A year ago, Greenspan told Congress that he and his colleagues hoped to raise the federal funds rate to a "neutral" level that would neither spur nor slow economic growth. He has declined to put a number on it, but other Fed officials have cited estimates that the neutral rate is 3.5 to 5.5 percent, depending on economic conditions.
Since then, many analysts have assumed that debate would focus on where the neutral rate lies, with some Fed officials wanting to stop near the low end of the estimated range and others preferring to rest near the high end.
But if inflation pressures continue to build, Fed policymakers will have to decide between stopping at a neutral level -- whatever that may be -- and briefly raising the funds rate higher, to a level that slows economic growth. Some economists argue that it's better for the Fed to overshoot a bit than to risk stopping short.
In his remarks to Congress this week, Greenspan did not use the word "neutral" and did not characterize how high the rate might go.
"I can't comment on the [Fed's] actions in the future because we haven't taken them," Greenspan said yesterday during a Senate Banking Committee hearing, responding to a question about where rates are headed.
Greenspan cited a variety of risks that inflation might move higher. They included high energy costs, the improving job market and slowing worker productivity, or output per hour of labor. He noted that low mortgage rates are helping pump up house prices and consumer spending.
"We doubt that Fed officials yet have a good idea about the precise stopping point," William C. Dudley, chief economist at Goldman Sachs & Co., wrote in an analysis of Greenspan's testimony.
"One key area of focus will remain the housing market," because of its effect on consumer spending, Dudley wrote. Rising home values encourage homeowners to spend more by making them feel wealthier, providing more collateral for home equity loans and creating cash windfalls for sellers.
Fed policymakers are pleased that the robust housing market is fueling economic growth, helping to offset the drag from the trade deficit and high oil prices. But they are likely to keep raising the funds rate if they conclude that the housing market, by pumping up consumer demand, is fueling inflation.
The Fed doesn't control mortgage rates, which are determined by financial markets. But many economists say a higher federal funds rate should cause home loan rates to climb as well.
Dudley wrote: "When rates rise high enough to dent housing, then the end of the [Fed rate increases] will not lie far away."