Most leaders of the Federal Reserve viewed their decision to cut interest rates last month as a “close call,” according to minutes of the meeting released yesterday, a document that made it clear that the Fed is probably done with rate cuts for the foreseeable future.
The stock market fell sharply because of an increased sense that no more Fed rate cuts are in the offing and because oil prices rose again, creating yet more stress for cash-strapped consumers and businesses. The Dow Jones industrial average was off about 227 points, or 1.8 percent. Crude oil futures touched a trading record yesterday, at $134.15 a barrel.
Fed leaders have pulled back their expectations for growth. The most pessimistic of the group expect the U.S. economy not to grow at all this year. But they also expect higher inflation than they did in January, a reason for the reluctance to keep cutting rates.
The minutes contain strong signals that the policymakers think their interest rate cuts so far — seven cuts in the federal funds rate since September, totaling 3.25 percentage points — will probably be enough to combat the economic weakness.
“Most members viewed the decision to reduce interest rates at this meeting as a close call,” the document said, adding that the “risks to growth were now thought to be more closely balanced” by the risks of inflation. The document included sharp language about the “upside risk to the inflation outlook” from rising prices for oil and other commodity prices.
The message came through loud and clear to Fed watchers.
“They’re now firmly on hold,” said Ethan Harris, chief U.S. economist at Lehman Brothers, adding that he expects the Fed to neither lower nor raise its target for short-term interest rates soon.
Moreover, Harris said, since that policymaking meeting on April 30, economic data have been mediocre, not terrible, and financial markets have begun to stabilize. That solidifies the case for a pause on interest rates.
“It’s going to require quite a bit of new information to get them to move one direction or another,” Harris said.
The Fed is trying to maintain a tricky balance, signaling that markets remain fragile and that the central bank is ready to act if financial conditions go haywire or the economy heads south suddenly. But it wants to maintain credibility in its fight against inflation and doesn’t want people to expect more rate cuts if the economy is merely soft.
“Several members noted that it was unlikely to be appropriate” to cut rates further, the minutes said, “unless economic and financial conditions indicated a significant weakening of the economic outlook.”
The 17 top Fed policymakers — 12 regional bank presidents and five governors — dialed back their growth projections significantly from January to April. Their expectations for gross domestic product growth for this year now range from 0 percent to 1.5 percent; in January, the range had been 1 to 2.2 percent.
They expect the unemployment rate, now 5.1 percent, to end the year between 5.3 and 6 percent.
However, with prices of oil and food continuing their climb, the Fed officials also stepped up their expectations for inflation, saying they thought prices would rise 2.8 to 3.8 percent in 2008. That range was 2 to 2.8 percent in January.
The document also included more details of why two members of the Federal Open Market Committee — Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, his counterpart in Philadelphia — dissented from the decision to cut rates. Both were more worried about inflation than the rest. Fisher “was concerned that an adverse feedback loop was developing” whereby lower rates were contributing to a falling value of the dollar, higher commodity prices and thus higher inflation for Americans.