Fed Won't Rule Out Hikes

Stocks and bonds fall after the minutes of the March meeting are released.
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Federal Reserve

policymakers decided at their last meeting that additional rate hikes might be needed to fight inflation, but because of mixed signals on the economy, they chose to remove comments about further firming from their post-gathering statement.

At the two-day meeting, which wrapped up March 21, the

Federal Open Market Committee

members voted unanimously to keep the fed funds target rate at 5.25%. The rate, used by banks to charge each other interest on overnight loans, has been unchanged since last June.

"Recent developments were seen as supporting the

FOMC's view that maintaining the current target was likely to foster moderate economic growth and to further the gradual reduction of core inflation from its elevated level," according to the minutes of the meeting, released Wednesday.

"Nonetheless, the combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize," the minutes also read.

Stocks surged last month after the central bank decided to omit from its statement previous remarks that the "extent and timing of any additional firming that may be needed" will depend on economic data. The absence of that language, spurred in part by softness in the housing market, was interpreted by the market as meaning future rate increases were essentially off the table.

However, the Fed did offer something for the hawks, saying that certain cost measures had been higher than it liked to see.

FOMC members agreed that a "persistence of inflation at recent rates could eventually have adverse consequences for economic performance," the minutes indicated. "All members agreed the statement should indicate that the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

Wall Street was already weaker before the minutes were released, but afterward extended its losses. Recently, the

Dow Jones Industrial Average

was down 102 points, or 0.8%, at 12,472. The

Nasdaq

was off 22 points, or 0.9%, at 2455, and the

S&P 500

was lower by 10 points, or 0.7%, at 1438.

Treasury prices turned negative as traders reacted to the possibility of rates going up. The 10-year note fell 4/32 to 99 3/32 and was yielding 4.74%. The 30-year bond dropped 6/32 to 97 12/32, lifting the yield to 4.92%.

On the whole, the Fed said the information reviewed at the March meeting suggested the U.S. economy was growing at a modest pace in the first quarter. The members of the FOMC also felt that while recent data haven't been uniform, the economy should expand moderately in coming quarters.

"Most participants continued to expect a gradual decline in core inflation over the next year or two, fostered by stable inflation expectations, a likely deceleration in shelter costs and a slight easing of pressures on resources," the minutes read. "Nonetheless, all meeting participants expressed concern about the risks to this outlook."