The Fed warned against inflation in their statement, but the minutes released Tuesday, August 25, better highlights the extent of their growing worry:
"Participants expressed significant concerns about the upside risks to inflation, especially the risk that persistently high headline inflation could result in an unmooring of long-run inflation expectations. Some viewed the upside risks to inflation as having diminished modestly over the intermeeting period, mainly as a result of the drop in the prices of oil and some other commodities as well as the greater likelihood of persistent economic slack.
However, others viewed these risks as having increased, particularly in light of continued elevated readings on headline inflation, the low level of the real federal funds rate, anecdotal information suggesting that firms were having more success in passing higher costs on to their customers, and some signs of an upward drift over recent months in investors’ expectations and uncertainty regarding inflation over the longer run; moreover, the recent decline in energy prices might well be reversed in coming months.
In conclusion, policymakers agreed that the most likely move next will be to raise interest rates.
"Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation."
Dallas Fed President Richard Fisher dissented at the Fed’s last meeting, arguing that interest rates needed to be raised now in an effort to combat inflation pressures.
"Mr. Fisher dissented because he favored an increase in the target federal funds rate to help restrain inflation and inflation expectations, which were at risk of drifting higher. While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation.
In his view, businesses had become more inclined to raise prices to pass on the higher costs of imported goods and higher energy costs, the latter of which were well above their levels of late 2007. Accordingly, he supported a policy tightening at this meeting."
Mr. Fisher has voted to raise rates in the last two meetings.
Since the Fed’s early August meeting, however, commodity prices have dipped and have helped in combating inflation. Most economists expect interest rates will be held steady at the next Federal Open Market Committee (FOMC) meeting held on Tuesday, September 16, 2008.
In fact, Fed Chairman Ben Bernanke acknowledged the commodity price decline in a speech Friday and forecasted moderate inflation under current conditions.
While the meeting notes seem to show a growing minority of policymakers more inclined to raise interest rates to fight inflation, the majority stance looks to be one of patience.