Washington, DC, August 29, 2006--Worries about short-term damage to the economy led Federal Reserve policymakers at their August meeting to halt a more than two-year-old interest rate-raising campaign.
By taking a breather, the Fed would have time to assess the toll on economic activity and inflation of its 17 rate increases since 2004, according to minutes of the Fed's Aug. 8 meeting, released Tuesday. It can take time for rate increases to work their way through the economy.
"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 minutes said.
The Fed's goal is to push up rates to thwart inflation but not so much as to cripple economic activity. It's a tricky task, economists say.
Fed chief Ben Bernanke and all but one of his central bank colleagues voted to hold the federal funds rate steady at 5.25 percent at the August meeting. The funds rate, the interest banks charge each other on overnight loans, affects a variety of other interest rates charged to businesses and consumers. It is the Fed's main tool to influence the economy.
The lone dissenter, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., favored another rate increase. "He believed that further tightening was needed to bring inflation down more rapidly than would be the case if the policy rate were kept unchanged," the minutes said.
Even though nearly all the Fed members voted to leave the funds rate alone in August, many thought the decision to do so "was a close call" and that another rate increase "could well be needed" to fend off inflation, the minutes said.
Still, members expressed hope that the slowing economy would eventually lessen inflation pressures.
"Most members anticipated that inflation pressures quite possibly would ease gradually over coming quarters and the current stance of policy could well prove to be consistent with satisfactory economic performance," the minutes said.
