Emphasizing the dangers to the economy, the Fed said in its statement that a substantial easing of interest rates in recent months, “combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.” However, the Fed warned that “tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters.”
By a vote of 10 to 1, policy makers declared that inflation remained “of significant concern” — a description that seemed to put slightly less emphasis on the inflationary risks of keeping rates low than the policy makers had at their meeting in June. The lone nay vote came from Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who sought an immediate increase in the federal funds rate, a short-term rate that influences the cost of mortgages, car loans and a host of other consumer credit.
Mr. Fisher has maintained for weeks that the danger of an inflationary spiral warrant a rate increase even at the risk of further slowing a damaged economy.
But in a nod to Mr. Fisher’s concerns, the policy makers’ statement gave considerable recognition to his point of view that “the upside risks to inflation are also of significant concern.”
“Inflation has been high,” the statement also said, “spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”
Investors responded to the Fed statement by adding a spurt to already higher shares. Stocks, which had been trading up about 230 points on lower oil prices, quickly jumped another 40 to 50 points.
Most Fed policy makers, including Ben S. Bernanke, the chairman, have argued that the greatest immediate danger to the economy is not inflation, but the damage from still-falling home prices, the tight credit market, shrinking employment and weak wage growth.
These multiple problems work against inflation. Still, the policy makers, at their meeting on June 25, acknowledged that the surge in food and oil prices may seep into the cost of a multitude of everyday items.
While that seepage is not yet evident in the Consumer Price Index, Fed policy makers, in the statement they issued after the June 25 meeting, suggested that inflation in the weeks ahead could be as troubling as any economic weakness. It was the first time this year they had given the two equal billing.
The June statement said: “In the light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”
The emphasis on inflation reflected in part the views of Mr. Fisher, and one or two others on the Fed’s policy making open market committee. They argue in effect that as prices for food and fuel outrun incomes, American workers will somehow find the bargaining power to get raises and their employers, in turn, will raise prices to offset the additional wage costs, setting off an inflationary wage-price spiral. That last happened during the first great oil crisis, in the 1970s, when workers had far more bargaining power than they do today.
Whatever the future holds, seven weeks after the policy makers’ last meeting, in late June, the surge in food and oil prices has not spread to the multitude of other items in the price index.
Indeed, oil prices have declined in the last two weeks. The economy, on the other hand, appears to have weakened, suggesting to most Wall Street forecasters that an increase in the federal funds rate — to reduce inflation pressures by slowing the economy — will not be forthcoming from the Fed until early next year.
“You can make the argument that the inflation risks are a little less than in June and the growth outlook a little worse,” an economist at Lehman Brothers, Michelle Meyer, said, adding: “We are starting to see signs that consumers are pulling back even faster than we expected. We thought the tax rebates would really boost consumption in the third quarter and we are not seeing that.”
The European Central Bank and the Bank of England, scheduled to meet later this week, are also expected to keep interest rates steady, or perhaps even cut them.
When the European bank’s governors last met, in June, they raised their key rate a quarter of a point, to 4.25 percent, but since then the European economy has slowed. The Bank of England, in contrast, did not change its benchmark rate of 5 percent in June, but with housing in trouble, a rate cut now is possible, some analysts say.