The Federal Reserve has reinforced its position that inflation remained the biggest threat to the economy in its minutes from the March meeting. At the last meeting, Federal Reserve officials had concluded that more interest rate increases might be needed to suppress rising inflation, although they had also expressed concern that the economy could slow more than forecast. The Fed has said in minutes of the Open Market Committee’s March 20-21 meeting that further policy firming might prove essential to nurture lower inflation.
The minutes has given no hint of a rate cut, which some economists and experts had anticipated and suggested that policy makers stayed convinced that their anticipation of an economic recovery would be borne out. However, in the wake of the amplified ambiguity about the outlook for both growth and inflation, the committee also agreed that the statement should no longer mention only the possibility of further firming.
The Fed had maintained their benchmark interest rate at 5.25 percent on March 21, at the same time expressed reservations about their forecast for slowing inflation. The minutes further outlined, ‘The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing’. Evidently, the minutes demonstrated that central bankers grappled with an increasing ambiguity about which direction the economy was headed.
However, additional confirmation of slow-moving business investment and recent developments in the subprime mortgage market suggests that the downside risks relative to the prospect of moderate growth had increased in the weeks since the January meeting of Fed policymakers. On the other hand, the minutes has said that Fed policymakers at the meeting agreed that on the notion that while recent economic data had been mixed, the economy was expected to develop at a moderate rate in coming months.
Analysts have argued that the Fed will not consider cutting rates until inflationary pressures ease further. Although housing and manufacturing are in serious slowdowns, and weakness is not likely to threaten to derail an expected rebound in growth this year. Economists anticipate that the Fed will leave its federal funds rate, the interest that banks charge each other, unchanged at 5.25 percent when it meets next.
