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Fed backed Aug. hike 9-1
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October 7, 1999: 3:34 p.m. ET
Minutes of Aug. 24 meeting also show most favored neutral bias
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NEW YORK (CNNfn) - All but one of the Federal Reserve's voting governors was in favor of raising short-term interest rates in August at the Federal Open Market Committee meeting, and equally in favor of altering the Fed's bias toward future rate changes to neutral.
The Federal Open Market Committee voted 9-1 at its Aug. 24 meeting in favor of raising the target rate on overnight loans between banks by a quarter point to 5.25 percent, minutes of the August meeting released Tuesday revealed. The target rate, known as the fed funds rate, sets the standard for consumer and business loans.
In the view of most members, a quarter-point nudge in short-term lending rates represented "a limited policy move" that would augment June's quarter-point rate rise and "at least for now would position monetary policy where it needed to be to foster continued subdued inflation and good economic performance," the minutes said.
Still no inflation
Concern about the robust job market, rising wages, strong consumer spending and surging industrial production dominated discussions of the meeting, prompting concern about an eventual uptick in inflation, according to the minutes. "A small preemptive move at this time would provide a degree of insurance against worsening inflation later," the minutes said.
As for inflation, which the Fed and Chairman Alan Greenspan have made clear they will keep at bay, "the outlook for price inflation remained subject to considerable uncertainty," particularly the effects of rising prices for oil and other commodities, the minutes said.
As he did in June, Dallas Fed Bank President Robert McTeer, a known supporter of the so-called New Economy theory of strong growth without inflation. dissented from the rate increase at the August meeting. "Mr. McTeer dissented for essentially the same reasons he did at the June 30 meeting: low inflation, and, except for energy, minimal inflation in the pipeline," the minutes said.
Fed committee members also expressed some concerns about the appreciation of the Japanese yen against the U.S. dollar and the "indirect
effects of the dollar's depreciation" as possible "harbingers of rising price inflation."
No currency concern
At the same time, "this depreciation was partially offset by a rise in relation to the currencies of other important trading partners, reflecting increased uncertainty in financial markets in many Asian and Latin American countries that was associated in part with concerns about rising U.S. interest rates," the minutes said.
All committee members with the exception of McTeer also voted to adopt a "neutral bias," a code word used to telegraph to financial markets which direction the Fed is leaning toward on future rate increases.
Even though many members continued to see a possible increase in inflation pressures as the main threat to sustained economic expansion, "they did not anticipate that further tightening would be needed in the near term, allowing the Committee time to gather substantial additional information about the balance of aggregate supply and demand," the minutes said.
"Because there was substantial uncertainty relating to the extent and timing of prospective inflationary pressures and thus the possibility that further firming of policy might not be needed in the very near term, the directive did not contain any bias relating to the direction of possible adjustments to policy in the intermeeting period," the minutes said.
Clarifying a "bias"
As for the announcement of a "bias" itself, the committee revealed that its statements have been "subject to differing interpretations, and the committee's decision to announce immediately significant changes in the symmetry or asymmetry in the directive had made it desirable to clarify its
meaning," the minutes said.
Based on that, a new subcommittee of the FOMC was formed to examine ways the Fed can announce its decisions more clearly to financial markets, particularly its adaptation of a "bias" toward its future intentions on interest rates. The new subcommittee will be called the Working Group on Directive and Disclosure Policy.
The FOMC meets eight times per year at intervals of five to eight weeks. Deliberations are held in secret. All seven Fed governors vote, although only five voted in August because two seats are vacant. Five of the 12 Fed bank presidents also vote. Voting among them rotates every two or three years, except for the president of the New York Fed, who always votes.
This past Tuesday, Fed officials opted to leave short-term interest rates unchanged, though they announced a "tightening bias" toward another rate increase at some point down the road. Minutes from that meeting will be released Nov. 18. 
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