Federal Reserve

policymakers met in September, most of them felt that U.S. economic activity had continued to decelerate in recent months, giving them the confidence to again leave rates unchanged.

At the same time, some officials expressed concern that they might have a credibility problem if they were perceived as not being tough enough on inflation, according to the minutes of the Sept. 20 meeting released Wednesday.

The minutes noted that "several participants worried that inflation expectations could rise and the Federal Reserve's willingness to carry through on its intention to seek price stability could be called into question if cost and price pressures mounted or even if there was no moderation in core inflation."

Additionally, many attendees emphasized that they remained "quite concerned" about the outlook for inflation.

Most bankers thought the most likely scenario was a reduction in inflation pressures, "but the anticipated decline was only gradual and the uncertainties around that forecast were skewed toward higher rather than lower inflation rates."

During their discussion of major sectors of the economy, officials focused especially on developments in the housing market. Although the situation varied somewhat around the country, activity, they said, was still contracting in most regions.

Last month, the Fed left its target fed funds rate unchanged at 5.25% for the second consecutive meeting. Before the two pauses, rates had been hiked at 17 straight meetings, by a quarter-point each time, going back to June 2004.

Also for the second straight time, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented and argued in favor of another rate increase. The minutes indicate Lacker believed further tightening was needed to bring inflation down more rapidly than would be the case if the fed funds rate was left alone.