Fed officials saw April rate cut as ‘close call’

Thursday, May 22, 2008 at 1:33am
Minutes of the April 29-30 Federal Open Market Committee meeting show risks to growth and inflation are closely balanced. Bloomberg News

Most Federal Reserve officials viewed the decision to cut the benchmark interest rate as “a close call” in April, signaling they may hold off from further reductions.

“The risks to growth were now thought to be more closely balanced by the risks to inflation,” minutes of the April 29-30 Federal Open Market Committee meeting, released in Washington Wednesday, showed.

Several policymakers judged “it was unlikely to be appropriate” to lower rates further unless data indicated a “significant weakening” in the outlook.

Stocks tumbled after the report stoked speculation Chairman Ben S. Bernanke and his colleagues are finished lowering borrowing costs as the threat of inflation rises. Questions about whether to lower the rate last month came even as officials cut their 2008 growth estimate by almost 1 percentage point.

“The Fed is wary about the economy, but cautious to act due to high inflation,” said Christopher Low, chief economist at FTN Financial in New York. The report “reinforced the idea of a pause” from rate reductions, he said.

Investors anticipate officials will keep the rate at 2 percent when they next meet June 24-25.

Fed officials cut the benchmark lending rate by a quarter point on April 30. The 2.25 percentage points of reductions this year were the fastest in almost two decades.

Two district-bank presidents dissented from the April rate cut, while Fed Gov. Kevin Warsh said yesterday that central bankers should be “inclined to resist” calls for further moves “even if the economy were to weaken somewhat further.”

Warsh made the remarks in a Washington speech.

In their April 30 statement, officials dropped previous language referring to “downside” risks to economic growth remaining even after the rate cut.

“The committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth,” the minutes said. Officials judged that the risk of another round of financial disruptions hobbling the economy had “receded” since their March meeting.

Fed officials lowered their 2008 economic growth projections to 0.3 percent to 1.2 percent from a January forecast of 1.3 percent to 2 percent. The figures represent the median estimates of the five current Fed governors and 12 district-bank presidents. Next year, the panel sees an expansion rate of 2 percent to 2.8 percent.

The April 30 statement said that “substantial” rate cuts over the past 12 months “should help promote moderate growth over time.”

“Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and that fact that some indicators suggested that inflation expectations had risen in recent months,” the minutes read.

— Bloomberg News

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