imported post
Fed Minutes Say Rate Outlook May Change `Before Long' (Update3)
Nov. 22 (Bloomberg) -- Federal Reserve policy makers discussed the need ``before long'' to change their outlook for the benchmark U.S. interest rate, with some worried about the risk of raising it too much, minutes of their Nov. 1 meeting showed.
Some members of the rate-setting Federal Open Market Committee ``cautioned that risks of going too far with the tightening process'' may eventually emerge. The report was released today in Washington.
U.S. Treasury notes rose after the minutes suggested the central bank may be closer to ending its 18-month series of rate increases and removing a phrase, present in every post-meeting statement since May 2004, that rates may continue to rise at a ``measured'' pace. The Fed raised the rate for a 12th straight time on Nov. 1, to 4 percent.
``Several aspects of the statement language would have to be changed before long, particularly those related to the characterization of and outlook for policy,'' the minutes said, recounting discussion over the statement. ``Possible future changes in the sentence on the balance of risks to the Committee's objectives were also discussed.''
The ``balance of risks'' refers to a sentence in the Fed statement that since March has read, ``With appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.''
Futures traders pared bets that the Fed will increase its benchmark interest rate to 4.75 percent by April after the minutes were released. The yield on federal fund futures for April delivery fell 7 basis points at the Chicago Board of Trade to 4.575 percent. The drop signals traders see a 30 percent chance of an increase to 4.75 percent rate by April, down from 58 percent yesterday.
`Measured' Pace
The minutes, which don't attribute remarks to individual members, such as Fed Chairman Alan Greenspan, didn't specifically mention the possibility of removing the ``measured pace'' language. The Fed voted 10-0 on Nov. 1 to raise its main rate by a quarter percentage point to 4 percent, a four-year high.
Today's minutes ``confirm what the market expected,'' said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, in an interview. ``A couple more rate hikes between now and early next year.'' He said the minutes show some Fed members ``are beginning to see the light at the end of the tunnel.''
The 10-year Treasury note's yield fell 3 basis points, or 0.03 percentage point, to 4.43 percent at 2:46 p.m. in New York, according to broker Cantor Fitzgerald LP. Yields move inversely to prices.
Survey
Economists surveyed by Bloomberg News earlier this month predicted the Fed will raise its benchmark rate by a quarter percentage point in December and once again in both the first and second quarters of next year, bringing the rate to 4.75 percent by the end of June. The rate will hold at that level for the rest of the year.
Federal Reserve Bank of Chicago President Michael Moskow, a voting FOMC member this year, said yesterday that increases may be needed even after the Fed's benchmark rate reaches a so-called ``neutral'' level that neither spurs nor restrains economic growth.
``Even if the funds rate were at neutral, further changes in policy may be appropriate,'' Moskow said in a speech in New York. ``With inflation at the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern.''
At the time of the Nov. 1 meeting, ``while participants noted some recent favorable data on core inflation and labor costs, upside risks to the outlook for underlying inflation remained a key concern,'' the minutes said.
Economic Outlook
The average retail price of a gallon of gasoline fell 11 percent since the Fed's Nov. 1 meeting, to a five-month low, and U.S. government reports in the last three weeks showed economic strength and slowing inflation.
``We're at full employment, we've been growing above trend, we're near the upper end of the comfort zone for at least the key measure of inflation,'' said Laurence Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors LLC in Washington, in an interview before the report. ``That's what's driving monetary policy to continue to tighten.''
Meyer forecasts three more quarter-point increases in the benchmark overnight lending rate, raising it to 4.75 percent in March.
The minutes showed the Fed discussed a possible slowdown in consumer spending. ``The erosion of consumer confidence, still- elevated gasoline prices, and the prospect of higher heating bills might augur weakness ahead,'' the minutes said, citing some participants.
Bernanke
Ben S. Bernanke, a former Fed governor and the White House's nominee to replace Greenspan, who retires after the Fed's Jan. 31 meeting, was approved by the Senate Banking Committee last week and awaits a confirmation vote by the full Senate.
Prices paid by consumers increased at the slowest pace in four months in October, industrial production rose by the most in 17 months, and retail sales excluding auto dealers and gas stations jumped 1.1 percent, the most in six months.
The central bank has been trying to prevent inflation from taking hold as economic growth accelerated to a 3.8 percent annual rate in the third quarter, the 10th straight quarter above 3 percent, and consumer prices rose in September by the most in 25 years.
Growth
The U.S. economy will probably grow at a 3 percent annual pace from October through December and then accelerate to 3.6 percent in the first quarter of next year, according to a Bloomberg News survey of economists from Oct. 31 to Nov. 8.
``The economy seemed to be growing at a fairly strong pace, despite the temporary disruptions associated with the hurricanes, and underlying economic slack was likely quite limited,'' according to the minutes.
Moskow said yesterday the central bank's preferred measure of inflation, the personal consumption expenditure index excluding food and energy, rose by 2 percent during the last 12 months, at ``the upper end of the range that I feel is consistent with price stability.''
A similar measure of ``core'' inflation, the consumer price index excluding food and energy, will probably accelerate next year, prompting the Fed to raise rates by another three-quarters of a percentage point, a survey released earlier today said.
The core CPI will rise 2.4 percent from the fourth quarter of 2005 to next year's fourth quarter, up from a 2.1 percent gain for the same period ending this year, according to a survey of 45 economists from Oct. 28 to Nov. 11 by the National Association for Business Economics.
But in case think do not go seasonal,
