Originally created 05/25/05

Fed policymakers concerned about energy prices



WASHINGTON - Federal Reserve policymakers were concerned about energy prices stoking broader inflation when they met in early May but didn't believe they needed to raise short-term interest rates more aggressively.

According to minutes of the meeting released Tuesday, "participants voiced concerns about recent price trends."

"They expected inflation to remain contained but also perceived that the risks to that inflation outlook now might be skewed somewhat to the upside."

Even so, Fed Chairman Alan Greenspan and his colleagues at the May 3 meeting decided to stick with their policy of gradually boosting interest rates to keep inflation and the economy on an even keel.

At the May meeting, the Fed raised rates by one-quarter percentage point to 3 percent. It marked the eighth rate increase of that size since the Fed began to tighten credit last June.

To signal that it had grown more concerned about inflation from its previous meeting on March 22, the Fed in May dropped language that had been in the March statement. The March language had noted that the rise in energy prices had not fed into "core" consumer prices, which track a broad range of prices except for energy and food costs.

Several weeks before the Fed's May 3 meeting, the government had reported that "core" inflation had climbed in March by 0.4 percent, its highest reading in 2 1/2 years.

Last week, however, a government report showed that "core" inflation was flat in April, a big improvement from March.

On Wall Street, investors' reaction to the Fed minutes was muted. The Dow Jones industrials, down before the Fed document was released, were off 39 points after the minutes came out.

Fed policymakers at their meeting in May expressed hope that a recent moderation in energy prices, along with a labor market that didn't appear to be spurring wage inflation, would mean that inflation wouldn't become a problem to the economy.

"On balance, measures of core inflation were thought likely to remain in check over the remainder of this year and next," the Fed minutes said.

High energy prices had crimped consumer and business spending, important ingredients for healthy economic activity. The economy grew at a 3.1 percent annual rate in the first three months of 2005, the slowest pace in two years.

Oil prices skyrocketed into record territory in March and closed at a new peak of $57.27 a barrel at the beginning of April. Prices have since retreated and now are above $49 a barrel.

While the Fed blamed high energy prices for the economic slowdown, it didn't seem overly worried by it. "Most members regarded the recent slower growth of economic activity as likely to be transitory," the minutes said.

In fact, even with the string of rate increases, all members agreed that interest rates still remained "too low," the minutes said.

That reinforced economists' beliefs that the Fed will boost rates at its next meeting in late June as well as through much of this year.

"Rates are definitely going higher. That is for sure. The minutes support that," said Richard Yamarone, economist at Argus Research Corp.

Some economists believe the Fed's key interest rate, now at 3 percent, could climb to 4 percent by the end of this year.

On the Net:

Federal Reserve: http://www.federalreserve.gov