WASHINGTON (AFP) — Federal Reserve policymakers agreed at their meeting last month that their next move on interest rates would probably be an increase, after a series of easing moves, minutes released Wednesday showed.
The minutes from the Federal Open Market Committee's June 24-25 meeting suggested that the panel would likely go no lower than the current federal funds rate of 2.0 percent.
"With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate," the minutes said.
"Indeed, one member thought that policy should be firmed at this meeting. However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear."
The panel at the meeting made no change in the funds rate, ending a string of rate cuts totaling more than three percentage points since last September.
Dallas Fed president Richard Fisher had dissented in the meeting, calling for an increase in rates.
Fisher's fear, according to the minutes, was that "while the financial system was still frail and downside risks to growth remained, the risk that inflation would fail to moderate as expected by the committee had increased substantially over the inter-meeting period."
The policymakers said the latest data "reduced odds" for "an appreciable contraction of economic activity" but they were less confident about a strong upturn.
"Most participants judged that the slightly firmer path of (consumer) spending did not presage a near-term strengthening of the expansion," the minutes showed.
"Economic activity would probably continue to expand slowly over the next several quarters, restrained by a range of factors, including strains in financial markets and institutions and the resulting tightness of credit conditions; ongoing weakness in the housing sector; and the increases in energy and agricultural commodity prices."
The minutes showed apparent disagreement over the economic outlook among the Fed members, with worries expressed both on inflation and weak growth.
Some argued that real interest rates were in fact "negative" after adjusting for inflation, allowing relatively easy money to boost economic activity.
These members argued that "if the negative real federal funds rate was maintained, it could well lead to higher trend inflation," according to the minutes.
However, other officials indicated that a "high level of risk spreads and the restricted availability of credit" made it more difficult to get financing and that "indeed, borrowing costs for many households and businesses were higher than they had been last summer."
Fed chairman Ben Bernanke, in delivering the central bank's semiannual economic report to Congress this week, noted that the Fed had lifted its outlook for the US economy in 2008 but warned of numerous risks including a potentially troublesome rise in inflation and stressed financial markets.
The central bank called for 2008 growth in a range of 1.0 to 1.6 percent, up from an April projection of 0.3 to 1.2 percent. The inflation outlook was hotter at 3.8 to 4.2 percent for overall prices but the outlook for "core" inflation excluding food and energy was unchanged at 2.2 to 2.4 percent.
Bernanke also indicated the Fed was monitoring the "considerable stress" in financial markets that has affected Fannie Mae and Freddie Mac, the two government-sponsored, shareholder-owned mortgage finace giants that underpin the US housing sector.
"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke said.
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