Federal Reserve officials signaled they are prepared to quickly reverse last month's interest-rate cuts after concluding that borrowing costs need to be kept low for now.
Policy makers cut their 2008 growth forecasts and said that rates should be held down “for a time,'' minutes of their Jan. 29-30 meeting showed yesterday. They also called inflation “disappointing,'' and some foresaw raising rates, possibly at a “rapid'' pace once the economy recovers.
The threat goes beyond remarks by Chairman Ben S. Bernanke, who last week warned that policy will have to be “calibrated'' over the next year to meet both inflation and growth objectives. Central bankers are wary of past criticism for keeping rates too low, too long and inflating asset bubbles, said analysts including David Greenlaw at Morgan Stanley.
“I don't think there's any question that they've learned from those experiences,'' said Greenlaw, chief fixed-income economist at the firm's New York office. “That lesson becomes more powerful as you get lower and lower on the funds rate target.''
The minutes did nothing to dispel investor expectations for another half-point cut in the federal funds rate to 2.5 percent at the Federal Open Market Committee's next meeting on March 18. Policy makers lowered the rate by 0.75 percentage point on Jan. 22 in an unscheduled decision and by a half point at the regular meeting eight days later.
Battling Recession
Bernanke and his colleagues are trying to avert the first recession since 2001. At the Jan. 29-30 meeting, Fed officials cut their 2008 forecasts for economic growth a third time, by about a half percentage point, and raised unemployment projections, according to the minutes.
At the same time, inflation is accelerating, spurred by higher energy and commodity costs, and officials are concerned about the public's perception of price pressures. “Participants agreed that continued stability of inflation expectations was essential,'' the minutes said.
“The central bank needs to monitor credit spreads and other incoming data for signs of financial market recovery and should be prepared to take back the insurance once the recovery becomes clearly established,'' Fed Governor Frederic Mishkin said in a Feb. 15 speech.
Not `Gradualist'
The reference to a “rapid'' change in policy means a change from the “gradualist'' approach of 2004 to 2006, when the Fed raised rates in quarter-point steps at 17 straight meetings, Greenlaw said.
Before raising rates in June 2004, Fed officials kept the benchmark rate at a 45-year low of 1 percent for a year to counter the risk of persistent declines in consumer prices quick payday loan.
“That encouraged the financial markets to the kinds of excess that we're all paying for now,'' said Credit Suisse Group Chief Economist Neal Soss, who worked as an aide to former Fed Chairman Paul Volcker.
The Fed typically lifts borrowing costs in quarter-point increments, refraining from half-point moves since a series of increases in 1994-1995.
This time, Fed officials are expressing a readiness to shift policy quickly.
“When the time comes, when it's appropriate, we have to move in a timely way,'' San Francisco Fed President Janet Yellen said Feb. 12. Fed officials will be “thinking'' about the last series of rate increases in deciding whether a faster pace would be appropriate, she said.
Conference Call
Minutes of the January meetings showed the FOMC held a conference call Jan. 9 during which most officials judged “substantial'' rate cuts “might well be necessary'' soon. The following day, Bernanke gave a speech reflecting that message.
Fed policy makers now expect U.S. gross domestic product to expand by 1.3 percent to 2 percent in 2008, compared with the 1.8 percent to 2.5 percent they predicted in October, the central bank said in releasing updated quarterly forecasts.
Government figures yesterday indicated the U.S. housing recession will continue into a third year. Housing starts stayed near the lowest level since 1991 in January, while building permits dropped to a 16-year low.
The faltering economy has yet to damp inflation, a separate report showed yesterday. The Labor Department's measure of consumer prices rose 4.3 percent in January from a year ago, up from a 4.1 percent rate in December. Stripping out food and energy, the core gauge rose 2.5 percent, the most since March.
Rising energy and commodity costs, along with food prices, are pushing up inflation. Crude oil rose to a record $101.32 a barrel this week.
“They've got a problem: they've got rising inflation and the likelihood of recession,'' Robert McTeer, former president of the Federal Reserve Bank of Dallas and now a fellow at the National Center for Policy Analysis in Dallas, said in a Bloomberg Television interview. “I don't think they can keep dropping their interest rate down.''
McTeer said the Fed may reduce its benchmark rate by another quarter point or “be through now.''
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