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U.S. Rates Could Go Up Again

The Federal Reserve remains biased towards raising interest rates again despite its decision on August 8 to suspend a long campaign of hikes, minutes from the meeting showed Aug. 29. Fed policymakers agreed that "inflation risks remained dominant and that consequently keeping policy unchanged at this meeting did not necessarily mark the end of the tightening cycle," the minutes said.

At the meeting three weeks ago, the U.S. central bank suspended a run of rate hikes stretching back to June 2004, arguing that slowing economic growth should depress inflation in the months ahead. After 17 consecutive hikes, the decision left the federal funds rate unchanged at 5.25%.

But the minutes documented clear concern about elevated readings on inflation and said the decision to call off the tightening campaign was "a close call". Most members of the Federal Open Market Committee believed "that core inflation was likely to decline gradually over the next several quarters, although appreciable upside risks remained."

Data since the Aug. 8 meeting have shown U.S. consumer and producer prices moderating while a range of sectors in the world's biggest economy, led by the property market, are clearly flagging. Now, some economists fear that the Fed went too far in raising rates and that the economy could be headed for a hard landing after years of stellar growth.

The Fed minutes anticipated the general downturn that is now becoming apparent. "The slowdown in the housing market, the effects of higher energy prices on household purchasing power, the waning impetus of household wealth effects on consumer spending, and the effects of past policy tightening were expected to hold economic growth below potential over the next six quarters," they said.

"Core consumer price inflation was projected to drop back somewhat later this year and next, mainly as the effects of higher energy and import prices abated." Higher costs of energy and borrowing appeared to have hurt consumer spending in recent months, the minutes indicated. The housing sector was now "a downside risk to the outlook for growth," they said.

But while business fixed investment had also flagged, "this development appeared mainly to reflect the timing of purchases, particularly of transportation equipment, and not weakness in the underlying trend. However, it was noted that if the reported slowing of increases in retail sales continued, businesses might trim capital spending plans," the minutes cautioned.

Copyright Agence France-Presse, 2006

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