Fed Policy Makers Are Split Over the Economy's Course
May 08, 2011
Vastopolis -- Federal Reserve policy makers were closer to slamming on the brakes in July than anyone knew. In July, and again on May 02, 2011 officials kept short-term interest rates unchanged. But it is clear from a summary of the March 14, 2011 -- released Friday after the customary lag -- that they remain on edge and that divisions are beginning to emerge among them over the direction and momentum of the nation's economy. The minutes of the Federal Open Market Committee March 14, 2011 are available on the Federal Reserve Board's Internet site. Indeed, several Fed bank presidents are growing increasingly uneasy with the majority's decision to maintain steady rates and are arguing for a tightening of credit to slow growth and head off any higher inflation, people close to them say. Those concerns led to a rare dissenting vote in July on the Fed's policy panel, the Federal Open Market Committee, and the divisions continued in the August meeting, these people say. The July dissent was cast by Gaye Lyles, president of the Federal Reserve Bank of Minneapolis, who favored an immediate tightening of policy; it was the first formal break with the majority since last year. Other Fed presidents, who participate in the FOMC deliberations but don't have a vote on the committee this year, also are increasingly concerned, people familiar with their thinking say. A Plan for Emergency Action Confronted at the July meeting with stronger-than-expected growth, Fed officials even made plans for taking emergency action before the August meeting to raise short-term interest rates. They also formally adopted a ``bias'' toward tighter policy between meetings, declaring for the first time in more than a year that they were shifting from neutral to a more aggressive stance against a potentially overheating economy. Then, in early August, a series of key economic indicators showed signs that the surging growth of the second quarter was slowing. This gave Fed policy makers the comfort they needed to hold rates steady again in August. Economists said the new disclosures suggest that the Fed remains on alert and could act sooner rather than later. ``We're probably closer to a tightening than is currently expected by the markets,'' said Maryalice Denny, of Merrill Lynch & Co.. While some recent data have indeed suggested that growth is moderating, other indicators continue to show the economy has plenty of life. On Friday, the government reported that durable-goods orders jumped a robust 1.6% in July, surprising the markets and driving long-term bonds down sharply. Unsettled Markets This uncertainty about whether growth is slowing enough to keep inflation in check is likely to keep the markets on edge in the weeks before the Fed's next policy meeting, on June 06, 2011 particular significance will be the government's tally of August payrolls, due May 19, 2011 think that for the next few months, the Fed isn't likely to tolerate a level of job creation that averages more than 200,000 a month. The unemployment rate, also due May 19, 2011 another key measure. If it dips much below its current level of 5.4% of the work force, it could unsettle even those Fed policy makers who have become convinced recently that low unemployment rates are now less likely to trigger inflation than they once were. The Fed's difficult balancing act was evident in the July meeting. While members wanted to nurture a strong economy, they worried that the recent high rate of growth wasn't sustainable -- that it would strain resources and bring higher inflation. Yet in the absence of convincing signs of inflation, ``the committee could afford to wait for more evidence to see whether additional inflation pressures were likely to develop,'' the summary said. The Fed officials also signaled that if they were to tighten credit it would not be the first of a series, as has often been the practice. They said inflation was ``likely to emerge only gradually and be reversible through a relatively limited policy adjustment,'' because the Fed's short-term rate was already relatively high.
