Washington, D.C., October 12, 2005--Federal Reserve policy makers grew more concerned about inflation after Hurricane Katrina and said that interest rates would probably have to move higher to restrain prices, according to minutes of the central bank's September 20 meeting released yesterday.
The policy-making Federal Open Market Committee said "upside risks to inflation appeared to have increased" after the storm struck the Gulf Coast on Aug. 29 and expected that "further rate increases probably would be required." The Fed panel voted 9 to 1 last month to raise its main lending rate for the 11th consecutive time, to 3.75%, the highest in four years.
The report does not suggest any dissatisfaction with the increase by the committee members, other than Mark W. Olson, a Fed governor whose dissent created the first nonunanimous vote in more than two years. Even so, the minutes suggest that the Fed may be laying the groundwork for changing policy language that now says rates may continue to rise at a "measured" pace.
"Participants' concerns about inflation prospects generally had increased" since August 9, the minutes said. Leaving the main rate unchanged "had the potential to mislead the public both about the committee's perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability."
The Fed has used the "measured" language to telegraph its rate intentions since May 2004. The minutes pointed to a possible shift.
"Some sentiment was expressed to consider changes to forward-looking aspects of the statement at upcoming meetings, in part because of the considerable reduction in monetary policy accommodation that had already been accomplished," the minutes said.
Mr. Olson, in his first dissent as a Fed governor, preferred that the Fed "defer policy action at this meeting, pending the receipt of additional information on the economic effects resulting from the severe shock of Hurricane Katrina," according to the minutes.
In raising the rate on September 20, the policy makers signaled they might do so again, saying the United States economy faced only a "near term" setback after Hurricane Katrina. The decision showed that the Fed, in the waning months of Alan Greenspan's term as chairman, is concerned more about potential inflation from energy prices than about slowing economic growth.
