Fed Rejected Ending Tightening Bias, Citing Inflation

Federal Reserve officials discussed dropping their inclination to raise interest rates, and rejected the idea because inflation was their ``predominant concern.''

``Members discussed whether the balance-of-risks language in its recent statements still was the best way to represent the views of the committee and decided that a change was not warranted at this time,'' the Federal Open Market Committee said in minutes of its Jan. 31 meeting released today. ``All members agreed that the statement should continue to stress that some inflation risks remained and note that additional policy firming was possible.''

Records of the gathering, which preceded Chairman Ben S. Bernanke's semi-annual testimony to Congress last week, show policy makers were unanimously guarded on inflation and waiting for solid evidence that price increases will subside. Hours before the minutes were released, a government report showed the consumer price index rose more than forecast in January.

Federal Reserve Bank of St. Louis President William Poole, in an interview today, said the report doesn't change his view that inflation seems poised to be ``gradually tilting down.''

``We will be more ready to act if news comes out on the unfortunate side of inflation,'' said Poole, who is a voting member of the FOMC this year. ``The prospects, it seems to me, are equally balanced for where the economy is likely to go.''

Fed officials voted to leave the benchmark rate at 5.25 percent for a fifth straight policy meeting. Traders see almost no chance of either an increase or reduction in borrowing costs by the end of July, and Bernanke reiterated in his testimony that the central bank will lift rates if needed.

`Out of Place'

``They decided to look at more data,'' said Chris Varvares, president of Macroeconomic Advisers LLC, a forecasting firm in St. Louis founded by former Fed governor Laurence Meyer. ``With the CPI we got today, it would have looked out of place to drop the tightening bias.''

``Participants did not yet see a downtrend in core inflation as definitively established,'' the minutes said. ``All members agreed that the predominant concern remained the risk that inflation would fail to moderate as desired.''

Officials are trying to sort through the risks of a weak housing market that's offset by low unemployment, which is in turn generating gains in income and spending. For now, they expect inflation to subside gradually with little cost to jobs or growth, forecasts presented to Congress last week show.

Bernanke told the Senate Banking Committee on Feb. 14 that moderating prices for energy, commodities and housing should ``help foster a continued edging down'' of core inflation.

Mixed Signals

So far, data are mixed. Core consumer prices, excluding food and energy costs, rose 2.7 percent for the 12 months through January, up from 2.6 percent a month earlier, the Labor Department said today. The three-month annual rate on the personal consumption expenditures prices index, minus food and energy, slowed to 2.1 percent in December from 2.3 percent in November.

Between the January meeting and Bernanke's testimony, Fed officials saw reports on prices, jobs, labor costs, factory orders, consumer confidence, earnings and retail sales.

While lower energy and commodity price quotes could ease price indexes, Fed officials noted in the minutes that they are still focused on the balance of overall demand and supply.

``The influence of more enduring factors, importantly including pressures in labor and product markets and the behavior of inflation expectations, would primarily determine the extent of more persistent progress'' on inflation, the minutes said.

Wage Growth

Labor markets and wage growth were also cited as inflation risks in the minutes.

``Many participants observed that labor markets remained relatively taut, with significant wage pressures being reported in some occupations,'' the minutes said. ``So far, aggregate measures of labor compensation were showing only moderate increases, but looking ahead, the possibility that labor costs might rise more rapidly'' could be an ``upside risk to inflation.''

source:www.bloomberg.com