Washington, January 5--At the Fed's Dec. 14 meeting, policymakers boosted the federal funds rate by one-quarter percentage point, marking the fifth increase in this key rate in 2004. The funds rate is the interest banks charge each other on overnight loans and is the Fed's main lever for influencing economic activity.
Even with that action, the Fed suggested the funds rate was still too low and needed to be moved higher to keep inflation and the economy on an even keel.
"With the economic expansion more firmly entrenched, cost and price pressures were likely to become a clearer, intermediate-term risk to sustained good economic performance," the minutes said.
Economists predict interest rates will probably go up by another quarter point when the Fed meets next on Feb. 1-2.
"The message in the Fed minutes is clear: more Fed tightening to come," said Stuart Hoffman, chief economist at PNC Financial Services Group. Hoffman and other economists believe the Fed will probably continue on a path of modest rate increases in the future.
But financial investors appeared to be interpreting the Fed's comments in the minutes as a possible signal of bolder rate increases, economists said.
"The markets are starting to fear a more aggressive Fed in 2005," said Richard Yamarone, economist at Argus Research.
On Wall Street, the Dow Jones industrial average fell 98.65 points to close at 10,630.78.
Before the Fed embarked on its rate-raising campaign in June 2004, the funds rate had been held at 1 percent, a 46-year low. Extra-low rates had been used as a tonic to help the economy recover from the 2001 recession.
With the economy clearly in recovery, the Fed began to move the funds rate up to a more normal level. It now stands at 2.25 percent.
Some Fed policy-makers, at the December meeting, believed that the long period of an extraordinarily low funds rate "might be contributing to signs of potentially excessive risk-taking in financial markets."
To support that point, they cited "a pickup in initial public offerings, an upturn in mergers and acquisition activity and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums."
Fed members agreed to keep a pledge that future rate increases probably would be gradual. A few questioned the need to retain this language.
Policymakers also decided at the December session to speed up the release of minutes after their meetings. They suggested this might provide investors a bit more insight about the future course of interest rate policy.
The action means that the minutes will be released three weeks after each meeting, versus a six-week lag.
Members said the minutes contained "a more complete and nuanced explanation of the reasons for the committee's decisions and view of the risks to the outlook than was possible in the post-meeting announcement, and their earlier release would help markets interpret economic developments and predict the course of interest rates."
