Fed Pause `Close Call'; Officials Unsure of Outlook (Update3)
By Scott Lanman and Rich Miller
Aug. 29 (Bloomberg) -- Federal Reserve officials saw their decision to suspend a two-year run of interest-rate increases as a ``close call'' and were unsure of the need for further tightening, records of their last meeting showed.
``Many members thought that the decision to keep policy unchanged at this meeting was a close call and noted that additional firming could well be needed,'' the Fed said in minutes of the Aug. 8 gathering, released in Washington today. ``Members generally saw limited risk in deferring further policy tightening that might prove necessary.''
That risk may be further diminished by reports since then showing slumps in home sales and consumer confidence as well as signs of slowing inflation. The minutes didn't indicate whether Richmond Fed President Jeffrey Lacker, who opposed the decision, had much support in his argument for an 18th straight increase.
``The pause will last through the end of the year,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``It appears to have been a tight consensus around a close call rather than a split.''
Stocks pared their decline after the report and the dollar surrendered a gain versus euro, while Treasury notes gained.
Waning Confidence
Hours before the minutes were published, the Conference Board reported that American consumers were less confident than any time in the past nine months, thanks to higher gasoline prices and a softening labor market.
The Conference Board's index dropped to 99.6 from 107.0 in July, the New York-based business group said today. The decline was the biggest since last September, after Hurricane Katrina battered the Gulf Coast.
Most voting Fed members felt that the current rate stance may prove ``consistent with satisfactory economic performance.'' The 9-1 decision, which left the benchmark lending rate at 5.25 percent, was the first of Chairman Ben S. Bernanke's tenure to feature an opposing vote.
The pause would give the FOMC time to digest more information, the minutes said. ``The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much,'' the report said.
In its statement on the decision, the rate-setting Federal Open Market Committee said that ``inflation pressures seem likely to moderate over time'' because of its 17 prior rate increases, surging energy prices and a cooling housing market. Bernanke hasn't discussed monetary policy or his economic outlook since testimony before Congress in July.
Voters Only
As is customary, today's report didn't reflect the policy views of presidents who aren't voting members this year, such as Chicago Fed President Michael Moskow. Last week, he suggested the Fed may tighten credit further, though it's waiting for more economic insight.
The Fed's preferred inflation gauge, the personal consumption expenditures price index minus food and energy, rose 2.4 percent in the year ending June, above Bernanke's ``comfort zone'' of a 1 percent to 2 percent increase per year. The measure was last below 2 percent in March 2004, suggesting some Fed officials have been tolerating inflation that's higher than their publicly stated comfort level.
Yet there are signs inflation may be slowing. The separate consumer-price index, minus food and energy, rose 0.2 percent from June to July, down from 0.3 percent the prior four months. A measure of wholesale prices, minus food and energy, unexpectedly fell last month for the first time since October.
At the meeting, Fed staff economists lowered their forecast for economic growth in the second half of 2006 and 2007, mainly because of recent revisions to gross domestic product.
Housing Impact
The housing slowdown, the effect of higher energy prices and past interest-rate increases ``were expected to hold economic growth below potential over the next six quarters,'' the minutes said of the staff forecast. ``Core consumer price inflation was projected to drop back somewhat later this year and next, mainly as the effects of higher energy and import prices abated.''
Meantime, the housing slump is deepening. Sales of previously owned homes fell in July to the lowest in more than two years, while the pace of new-home sales dropped 22 percent from a year earlier.
``Participants expressed considerable uncertainty regarding prospects for the housing sector,'' the minutes said.
Slackening Expansion
High fuel costs and the end of the housing boom are constricting consumer spending, which accounts for more than two-thirds of the U.S. economy. Gross domestic product grew at an annual rate of 2.5 percent last quarter, down from 5.6 percent in the prior three months, according to the Commerce Department's first estimate in July. The government will publish revised second-quarter GDP estimates tomorrow.
Bernanke will also have producer and consumer inflation reports for August in hand, as well the tally of jobs added by employers this month, before the next meeting of Fed policy makers on Sept. 20.
After making the rate decision, Fed members discussed how to better communicate their decisions and policy stances with the public, something that may represent a ``major challenge.''
The minutes didn't detail any specific proposals for changes to the meeting statements and other forms of communication. Central bankers will again discuss the issue at the Oct. 24-25 session.
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net
By Scott Lanman and Rich Miller
Aug. 29 (Bloomberg) -- Federal Reserve officials saw their decision to suspend a two-year run of interest-rate increases as a ``close call'' and were unsure of the need for further tightening, records of their last meeting showed.
``Many members thought that the decision to keep policy unchanged at this meeting was a close call and noted that additional firming could well be needed,'' the Fed said in minutes of the Aug. 8 gathering, released in Washington today. ``Members generally saw limited risk in deferring further policy tightening that might prove necessary.''
That risk may be further diminished by reports since then showing slumps in home sales and consumer confidence as well as signs of slowing inflation. The minutes didn't indicate whether Richmond Fed President Jeffrey Lacker, who opposed the decision, had much support in his argument for an 18th straight increase.
``The pause will last through the end of the year,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``It appears to have been a tight consensus around a close call rather than a split.''
Stocks pared their decline after the report and the dollar surrendered a gain versus euro, while Treasury notes gained.
Waning Confidence
Hours before the minutes were published, the Conference Board reported that American consumers were less confident than any time in the past nine months, thanks to higher gasoline prices and a softening labor market.
The Conference Board's index dropped to 99.6 from 107.0 in July, the New York-based business group said today. The decline was the biggest since last September, after Hurricane Katrina battered the Gulf Coast.
Most voting Fed members felt that the current rate stance may prove ``consistent with satisfactory economic performance.'' The 9-1 decision, which left the benchmark lending rate at 5.25 percent, was the first of Chairman Ben S. Bernanke's tenure to feature an opposing vote.
The pause would give the FOMC time to digest more information, the minutes said. ``The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much,'' the report said.
In its statement on the decision, the rate-setting Federal Open Market Committee said that ``inflation pressures seem likely to moderate over time'' because of its 17 prior rate increases, surging energy prices and a cooling housing market. Bernanke hasn't discussed monetary policy or his economic outlook since testimony before Congress in July.
Voters Only
As is customary, today's report didn't reflect the policy views of presidents who aren't voting members this year, such as Chicago Fed President Michael Moskow. Last week, he suggested the Fed may tighten credit further, though it's waiting for more economic insight.
The Fed's preferred inflation gauge, the personal consumption expenditures price index minus food and energy, rose 2.4 percent in the year ending June, above Bernanke's ``comfort zone'' of a 1 percent to 2 percent increase per year. The measure was last below 2 percent in March 2004, suggesting some Fed officials have been tolerating inflation that's higher than their publicly stated comfort level.
Yet there are signs inflation may be slowing. The separate consumer-price index, minus food and energy, rose 0.2 percent from June to July, down from 0.3 percent the prior four months. A measure of wholesale prices, minus food and energy, unexpectedly fell last month for the first time since October.
At the meeting, Fed staff economists lowered their forecast for economic growth in the second half of 2006 and 2007, mainly because of recent revisions to gross domestic product.
Housing Impact
The housing slowdown, the effect of higher energy prices and past interest-rate increases ``were expected to hold economic growth below potential over the next six quarters,'' the minutes said of the staff forecast. ``Core consumer price inflation was projected to drop back somewhat later this year and next, mainly as the effects of higher energy and import prices abated.''
Meantime, the housing slump is deepening. Sales of previously owned homes fell in July to the lowest in more than two years, while the pace of new-home sales dropped 22 percent from a year earlier.
``Participants expressed considerable uncertainty regarding prospects for the housing sector,'' the minutes said.
Slackening Expansion
High fuel costs and the end of the housing boom are constricting consumer spending, which accounts for more than two-thirds of the U.S. economy. Gross domestic product grew at an annual rate of 2.5 percent last quarter, down from 5.6 percent in the prior three months, according to the Commerce Department's first estimate in July. The government will publish revised second-quarter GDP estimates tomorrow.
Bernanke will also have producer and consumer inflation reports for August in hand, as well the tally of jobs added by employers this month, before the next meeting of Fed policy makers on Sept. 20.
After making the rate decision, Fed members discussed how to better communicate their decisions and policy stances with the public, something that may represent a ``major challenge.''
The minutes didn't detail any specific proposals for changes to the meeting statements and other forms of communication. Central bankers will again discuss the issue at the Oct. 24-25 session.
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net
