Fed Keeps Its Powder Dry

The FOMC's decision to leave rates unchanged was a 'close call,' and more hikes could be needed.
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Updated from 2:24 p.m. EDT

Even though

Federal Reserve

policymakers left short-term rates unchanged when they gathered earlier this month, the decision was "a close call," and participants at the meeting felt that additional hikes could be needed.

Those comments appeared in the minutes of the

Federal Open Market Committee's

Aug. 8 meeting that were released Tuesday. At that assemblage, the Fed kept its fed funds target rate at 5.25%. Going into the meeting, the central bank had lifted rates by a quarter point 17 straight times starting in June 2004.

Nearly all of the FOMC members favored keeping the target rate at its current level, but they also noted that elevated readings on costs and prices continue to be reflected in the incoming economic data.

"But with economic growth having moderated some, most members anticipated that inflation pressures quite possibly would ease gradually over coming quarters and the current stance of policy could well prove to be consistent with satisfactory economic performance," the minutes read.

"Under these circumstances, keeping policy unchanged at this meeting would allow the

FOMC to accumulate more information before judging whether additional firming would be necessary to foster the attainment of price stability over time."

The Fed also said the full effect of its previous rate increases probably hadn't yet been felt, and a pause was viewed as the correct move in order to limit the risks of tightening too much. The bankers "generally saw limited risk in deferring further policy tightening that might prove necessary, as long as inflation expectations remained contained."

At the meeting, Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, disagreed with the majority and argued in favor of another rate boost.

All of the FOMC members thought that the statement to be released after the meeting should "convey that inflation risks remained dominant and that consequently keeping policy unchanged at this meeting did not necessarily mark the end of the tightening cycle." They also "concurred that an indication that economic growth had moderated was appropriate."