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Fed Minutes Put Fear in Black and White

Policy members cited the drop in the dollar, slower productivity growth and high energy prices as factors that could boost inflation going forward. Some participants also said there is considerable uncertainty about the extent of resource slack in the economy and that it was possible the economy could soon be operating close to potential.

"This seems extreme to us but, together with other members' fears that loose policy is encouraging "excessive risk-taking," it is clear the Fed is set on higher rates," Shepherdson said.

Some Fed officials said they were worried that the prolonged period of low rates had contributed to risk-taking in financial markets, citing narrow credit spreads, an increase in initial public offerings and an upturn in merger and acquisition activity.

The committee believes that labor market conditions are "gradually improving" despite November's weak report. But a number of participants voiced concerns about domestic and global financial imbalances, saying the chances of significantly reducing the federal and current account deficits are "remote."

In its last policy statement, the Fed said the upside and downside risks to growth and inflation were "roughly equal," adding that it would "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."

The Fed released the minutes just three weeks after its last meeting, instead of the usual six. The decision to expedite the release of the minutes was announced at the December meeting.

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