Washington – Worried about inflation, Federal Reserve policymakers at their May meeting considered raising a key interest rate by half a percentage point before opting for a quarter-point increase.
Chairman Ben Bernanke and his Fed colleagues also decided to leave the door open to additional rate increases “in view of the risk that the outlook for inflation could worsen,” according to minutes of the Fed’s May 10 closed-door meeting released Wednesday.
Those minutes showed that Fed officials discussed a number of options – ranging from leaving rates unchanged to boosting them by a half-percentage point. Policymakers mulled these options as they weighed whether it was more likely that the economy would slow given the Fed’s previous rate increases or whether soaring energy prices might touch off broader inflation. Then they approved the quarter-point increase, the 16th consecutive hike of its kind.
That unanimous decision boosted the federal funds rate to 5 percent, the highest level in five years. The Fed had started the campaign to tighten credit in June 2004.
Policymakers deemed that action appropriate “to keep inflation from rising and promote sustainable economic expansion,” according to the minutes.
The funds rate, the interest that banks charge one another on overnight loans, affects a variety of other interest rates charged to consumers and businesses. It is the Fed’s primary tool for influencing economic activity.
The Fed said “a number of factors were augmenting the upside risks to inflation,” including a run-up in energy prices as well as some commodity prices and a weaker value of the U.S. dollar. A weaker dollar can raise the prices of imports flowing into the United States and thus can give U.S. producers more leeway to boost their own prices.
In late April, oil prices hit a record high of more than $75 a barrel. Gasoline prices also marched higher, topping $3 a gallon in some areas.
“Inflation pressures appeared to be somewhat greater than the committee had anticipated” when it gathered for its March meeting, the minutes said.
Looking ahead, though, the Fed was not clear what its next move might be.
“Given the risks to growth and inflation, committee members were uncertain about how much, if any, further tightening would be needed” after the May increase, the minutes said.
