Fed faction wants more tightness

Doug Henwood dhenwood at panix.com
Fri Mar 24 09:51:08 PST 2000

[The minutes are at <http://www.bog.frb.fed.us/FOMC/minutes/20000202.HTM>.]

Wall Street Journal - March 24, 2000

Fed May Weigh Lifting Rates A Half Point, Report Hints


WASHINGTON -- The Federal Reserve may consider moving more aggressively to damp the economy, raising interest rates by half a percentage point at a future meeting instead of the quarter-point moves taken so far, a new central-bank report suggests.

Five times since June -- most recently last Tuesday -- the Fed has raised its main rate target, by a quarter point. But in the deliberations preceding the February move, "a few members" of the policy-making committee "expressed a preference for an increase of 50 basis points ... to provide greater assurance against a buildup of inflationary expectations and inflation over coming months," according to a summary of that session.

Beyond the unspecified "few" who endorsed the half-point move in February, the minutes state that "other" officials on the 10-member committee agreed that the Fed "might need to move more aggressively at a later meeting." None is identified by name.

In the end, the committee voted unanimously to raise the target for the federal funds rate, the rate at which banks lend to each other overnight, by only a quarter point. The rate now stands at 6%, the highest level in five years.

The minutes for Tuesday's meeting won't be released until after the next rate-setting session, scheduled for May 16. But the case that the inflation hawks made in February for the half-point move hasn't changed, and it is likely they continued to make their pitch in this week's session. In the public statement that the Fed released after Tuesday's quarter-point move, it said that "economic conditions and considerations ... are essentially the same as when the committee met in February."

Many Fed watchers consider a quarter-point rise a near-certainty in May.

The February discussion lays out what would be the likely trigger points for a half-point increase. Those officials who showed a willingness to consider the bigger step said they would endorse such an increase if "imbalances continue to build and inflation and inflation expectations clearly begin to pick up."

The "imbalances" that the Fed worries about would include a further drop in the unemployment rate or an increase in the trade deficit. A jump in wages or reported inflation -- outside of oil -- also would probably ring alarm bells inside the Fed.

Those who prevailed in the argument for the quarter-point increase in February cited "the recently somewhat unsettled conditions in financial markets" -- a reference to the sharp volatility early in the year, a trend that has continued in recent weeks. The doves also noted that since "inflation and inflation expectations remained damped," there was "little risk in a gradual approach."

In particular, the Fed has been worried that the stock market's rapid gains, despite the wild swings up and down, are fueling the economy's rapid growth. The Fed's internal forecast prepared for the February meeting projected that the economy "would gradually moderate," but that assumption was based on a stock-market slowdown that hasn't taken place.

Indeed, in the February discussions, officials were perplexed in particular at the stock market's strength in the face of recent Fed actions. Officials noted that "equity markets had shown a remarkable resilience to higher interest rates as earning prospects continued to be marked up in association with the acceleration in productivity," the minutes say.

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