Federal Reserve governors argued a little more vociferously about economic growth and inflation when they met to decide the course of interest rates last month. But, with rising energy prices and Hurricane Katrina acting to offset one another, the Federal Open Market Committee seemed content with its current course of gradual tightening.

Minutes of the Sept. 20 meeting showed staff economists of the central bank lowered their estimate for economic expansion in 2005, citing Katrina. At the same time, members noted that the related surge in energy prices "was boosting overall inflation, and some of that increase would probably pass through for a time into core prices."

Members agreed that the devastation in the Gulf Coast would hold down spending in the near term. "But they also were of the view that aggregate demand and output would likely rebound before long, fueled in part by private spending to rebuild and outlays by the federal government to assist in the recovery.

"With growth of the economy expected to recover, meeting participants were concerned that price pressures, which had been elevated before the storm, could climb further, primarily as a result of additional increases in energy prices," the minutes showed.

In the statement accompanying the Fed's decision to lift interest rates for the 11th time in a row last month, FOMC members reiterated their previous expectations that "policy accommodation can be removed at a pace that is likely to be measured."

The minutes show there was talk about changing the language of future statements. "Some sentiment was expressed to consider changes to forward-looking aspects of the statement at upcoming meetings, in part because of the considerable reduction in monetary policy accommodation that had already been accomplished."

On Wall Street, where fears of inflation and of a more hawkish Fed have led to sharp drops in stock prices last week, investors breathed a sigh of relief. The Dow Jones Industrial Average jumped to an intraday high of 10,312 after their release, before giving back some ground. The blue-chip average was recently up 57.57 points, or 0.56%, at 10,296.33.

The S&P 500 was up 2.06 points, or 0.17%, at 1189.39, while the Nasdaq Composite remained down 6.93 points, or 0.33%, at 2071.99.

"On balance, this is a report that does not suggest that the Fed is about to tighten more aggressively," says John Lonski, senior economist at Moody's. "And it's also mildly upbeat on about economic prospects."

Neither of these signals pleased the bond market, which remains concerned that Fed policy may fall behind the curve on inflation, which erodes the value of fixed-assets such as bonds. In recent action, the benchmark 10-year Treasury bond was down 8/32 in price while its yield, which moves inversely, rose to 4.39%.

"Before the landfall of Hurricane Katrina on the Gulf Coast, expansion of economic activity had been solid, led by robust gains in housing and buoyant consumer spending," the minutes of the Fed meeting said.
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