Federal Reserve officials are likely to continue their interest-rate pause at 5.25 percent when they meet Sept. 20.
Minutes of the Aug. 8 Federal Open Market Committee meeting released Tuesday showed members delicately balanced between concern about persistently high inflation and an expectation that economic growth is slowing enough to bring that inflation down gradually over the next several quarters.
None of the economic data released since the meeting earlier this month has been consequential enough to disturb that balance. Yesterday's report from the Commerce Board that consumer confidence slipped substantially this month while jobs became somewhat more difficult to find was in line with the forecast of slower growth.
The FOMC decision this month to leave the lending rate target unchanged for the first time in 18 meetings was described in the minutes as "a close call."
"But with economic growth having moderated some, 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.
There's a good chance -- not a certainty -- that inflation will come down without the Fed having to squeeze all the growth out of the economy. Remember the central bank has a dual responsibility, keeping prices stable and maximizing sustainable employment.
Jeffrey M. Lacker, president of the Richmond Federal Reserve Bank, dissented, the minutes said, "because 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."
"Although real growth was likely to be somewhat lower in coming quarters, in his view it was unlikely to moderate by enough to bring core inflation down," the minutes said.
Tightening is obviously a matter of degrees when the FOMC can raise the lending rate target in quarter-percentage-point increments. Nevertheless, it would appear that Lacker expects the majority's expectation of a gradual decline in core inflation won't be met, and he would prefer to get on with the job of seriously squeezing the economy.
It could come to that if core inflation shows no sign of falling. However, it is much too early in the game for officials to adopt Lacker's view.
As the minutes explained, nearly all the voting members of the FOMC wanted to pause in raising the target to "allow the committee to accumulate more information before judging whether additional firming would be necessary to foster the attainment of price stability over time.
"The full effect of previous increases in interest rates on activity and prices probably hadn't yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much," the minutes said.
After all, after 17 consecutive increases, "members generally saw limited risk in deferring further policy tightening that might prove necessary, as long as inflation expectations remained contained," the minutes said.
It is clear from the minutes that the Fed Board staff and most, if not all, of the policymaking officials have revised the forecasts they made in June -- and that Fed Chairman Ben S. Bernanke made public in congressional testimony in July -- to show notably slower growth.
Lower growth estimate
As a result of revisions to GDP for the last three years that were released by the Commerce Department late last month, the board staff lowered its estimate of how fast the economy can grow without causing unemployment to decline or inflation to accelerate. While no figures were included in the minutes, the new estimate is below 3 percent, perhaps in the neighborhood of 2.5 percent.
Furthermore, the minutes said of the staff forecast, "The slowdown in the housing market, the effects of higher energy prices on household purchasing power, the waning impetus of household wealth effects on consumer spending and the effects of past policy tightening were expected to hold economic growth below potential over the next six quarters."
In other words, growth is likely to run at about a 2 percent annual rate through the end of 2007. That would be the slowest rate of increase in GDP since 2002 and presumably cause some rise in joblessness above the July rate of 4.8 percent. The August payroll and unemployment figures are due Sept. 1, with most analysts expecting another gain of about 100,000 jobs, almost the same as in the past four months, and little change in the jobless rate.
It remains a difficult time for Bernanke and other Fed officials, because the best course for policy is far from certain. For one thing, just how much damage the continuing slowdown in the housing sector will do to the economy is particularly hard to predict.
For now, sitting on their hands looks like the best way for Fed officials to go, and as the minutes said, doing so is of "limited risk."
Berry is a columnist for Bloomberg News.