Fed views inflation as biggest risk

Fed views inflation as biggest risk
By Eoin Callan in Washington and Michael MacKenzie in New York
Copyright The Financial Times Limited 2007
Published: April 11 2007 20:38 | Last updated: April 11 2007 20:38



The Federal Reserve views inflation as the biggest risk to the US economy in spite of the increasingly uncertain outlook for growth, according to the latest minutes of the Open Market Committee.

The minutes of the March 20-21 meeting, released on Wednesday, said all members of the committee agreed the “predominant policy concern remains the risk that inflation will fail to moderate as expected”. The hawkish comments underlined the reluctance of the central bank to cut interest rates and prompted a sell-off in stocks and government bonds.

The S&P 500 was down 0.6 per cent at 1,439.60, while the Dow Jones Industrial Average was off 0.7 per cent at 12,487.30.

Treasury yields rose, led by the two-year note that is largely influenced by expectations of Fed rate policy. The yield on the note rose to 4.73 per cent from a level of 4.68 per cent prior to the release of the minutes. The yield on the two-year was at 4.72 per cent, while the yield on the 10-year was at 4.735 per cent, up from an earlier level of 4.71 per cent.

Expectations for a rate cut in June were close to zero, while one quarter-percentage point rate cut was largely priced in for this year according to December eurodollar interest rate futures.

The Fed held rates steady in March at 5.25 per cent, but acknowledged in a statement at the time that the next move in rates could be down due to the uncertain outlook for growth.

“The committee agreed that further policy firming might prove necessary to foster lower inflation, but in the light of increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming,” the Fed minutes added.

John Shin, an economist at Lehman Brothers, said: “The minutes are a little bit more hawkish than anticipated. The thing that really stands out is that there seemed to be a general consensus on the committee that the upside risk to inflation was the predominant risk,” he said.

The minutes show the central bank reduced its forecast for growth in the first quarter “in response to weaker-than-expected incoming data on business equipment spending and federal defence purchases”.