imported post
washingtonpost.com
Fed in May saw signs of rising inflation
By Glenn Somerville
Reuters
Tuesday, May 24, 2005; 3:39 PM
WASHINGTON (Reuters) - U.S. Federal Reserve policy-makers noted "a discernible upcreep" in measures of inflation recently, raising worry that risks from accelerating prices were growing, minutes from their May 3 meeting showed.
"Core measures of price inflation had moved up over recent quarters and particularly so over the last few months," said the minutes from the Federal Open Market Committee meeting, which were issued on Tuesday.
"A discernible upcreep was apparent in survey measures of short- and, to a limited extent, long-term inflation expectations over recent months," the minutes said. Some members saw both the risks of inflation increasing and of growth slowing but the committee agreed overall that the risks were roughly equally balanced.
The minutes acknowledged some signs of recent economic slowing but thought they would be "transitory" and policy-makers "should not overreact to a comparatively small number of disappointing indicators" since expansion seemed to be on solid ground.
Since the May 3 meeting, the government reported a hefty 274,000 jobs were created in April and retail sales last month posted a solid 1.4 percent gain, easing market worries about a economic slowdown and justifying the Fed's optimism.
MORE RISES AHEAD
The minutes left no doubt that the Fed intends to keep raising borrowing costs, specifying that "the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run."
Economist Patrick Fearon of A.G. Edwards and Sons Inc. in St. Louis, Mo., said the U.S. central bank's rate-rise campaign has a way to run, judging by the minutes. "They feel as if they have some distance to go so the most likely prospect is for at least a couple more rate hikes," he said.
At the May 3 meeting, FOMC members raised the trend-setting federal funds rate for an eighth straight time since June by one quarter percentage point to 3 percent.
"They still view fed funds as too low to be consistent for price stability, and that means more rate hikes are coming," said Stephen Gallagher, chief U.S. economist at SG Corporate & Investment Banking in New York.
There were evidently growing doubts among the policy-makers about how to plot the future course of rate rises and about whether they were signaling their intentions in a way that was useful for financial markets.
STAY FLEXIBLE
"For many, heightened economic uncertainty in the current environment implied greater uncertainty about the range of possible policy outcomes and placed a premium on flexibility in setting policy at upcoming meetings," the minutes said.
Some felt that the increased uncertainty meant they should drop any forward-looking language from the statement they issue after FOMC gatherings, "if not at this meeting, then fairly soon," but they compromised.
All agreed to retain forward-looking language and felt that saying they would move at a "measured" pace "would not stand in the way of either a pause or a step-up in policy firming depending on events."
A considerable portion of the May 3 minutes dealt with energy prices and the shadow that costlier fuel was casting over the nation's economic prospects.
"Declines in energy prices in recent weeks were viewed as welcome, but participants noted that far-dated futures prices for oil remained quite elevated and that persistently high energy prices could trigger a range of deleterious effects on the economy," the minutes said.
Among other impacts, higher fuel costs were taking a toll on consumer and business confidence and "might be beginning to crimp corporate profits," the minutes said.
Some recent elevated inflation readings might stem from companies passing on higher energy costs in their product prices, the Fed said. If so, their impact on inflation should fade over time provided that inflation expectations are not fired up.
Besides moderating energy prices, the minutes said that import prices and costs for materials used in production processes might ease in coming months. "On balance, measures of core inflation were thought likely to remain in check over the remainder of this year and next," they said.
Spaf
