Most Fed Officials Saw April Rate Cut as `Close Call' (Update4)

By Craig Torres


May 21 (Bloomberg) -- Most Federal Reserve officials viewed the decision to cut the benchmark interest rate as ``a close call'' in April, signaling they may hold off from further reductions.

``The risks to growth were now thought to be more closely balanced by the risks to inflation,'' minutes of the April 29-30 Federal Open Market Committee meeting, released in Washington today, said. Several policy makers judged ``it was unlikely to be appropriate'' to lower rates further unless data indicated a ``significant weakening'' in the outlook.

Stocks tumbled after the report stoked speculation Chairman Ben S. Bernanke and his colleagues are finished lowering borrowing costs as the threat of inflation rises. Questions about whether to lower the rate last month came even as officials cut their 2008 growth estimate by almost 1 percentage point.

``The Fed is wary about the economy, but cautious to act due to high inflation,'' said Christopher Low, chief economist at FTN Financial in New York. The report ``reinforced the idea of a pause'' from rate reductions, he said.

Investors anticipate officials will keep the rate at 2 percent when they next meet June 24-25. Fed officials cut the benchmark lending rate by a quarter point on April 30. The 2.25 percentage points of reductions this year were the fastest in almost two decades.

Warsh Remarks

Two district-bank presidents dissented from the April rate cut, while Fed Governor Kevin Warsh said today that central bankers should be ``inclined to resist'' calls for further moves ``even if the economy were to weaken somewhat further.'' Warsh made the remarks in a Washington speech.

The Standard and Poor's 500 Index dropped 1.6 percent to 1,390.71 at the close of New York trading. Treasury prices fell, raising yields on benchmark 10-year notes to 3.82 percent from 3.78 percent late yesterday.

In their April 30 statement, officials dropped previous language referring to ``downside'' risks to economic growth remaining even after the rate cut.

``The committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth,'' the minutes said today. Officials judged that the risk of another round of financial disruptions hobbling the economy had ``receded'' since their March meeting.

Growth Forecast

Fed officials lowered their 2008 economic growth projections to 0.3 percent to 1.2 percent from a January forecast of 1.3 percent to 2 percent. The figures represent the median estimates of the five current Fed governors and 12 district-bank presidents. Next year, the panel sees an expansion rate of 2 percent to 2.8 percent.

The group raised its expectations for inflation, excluding food and energy, to 2.2 percent to 2.4 percent this year, from 2 percent to 2.2 percent. The Commerce Department's so-called core personal consumption expenditures price index is seen rising 1.9 percent to 2.1 percent next year.

The April 30 statement said that ``substantial'' rate cuts over the past 12 months ``should help promote moderate growth over time.''

``Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and that fact that some indicators suggested that inflation expectations had risen in recent months,'' the minutes said.

`Calibrated' Stance

Fed Vice Chairman Donald Kohn said yesterday that ``monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation of the medium term.'' He also said the recovery in growth into next year may be ``relatively moderate'' as it will take time for investors to regain confidence and for housing demand to rise.

Traders see a 90 percent chance the FOMC will keep its target rate for overnight loans between banks at 2 percent when they next meet June 24-25, according to futures prices quoted on the Chicago Board of Trade. The contracts indicate a 23 percent likelihood officials will raise the rate in September.

``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' the minutes said today, referring to the April 29-30 meeting.

Policy makers lowered their growth forecasts after economic figures showed a continued decline in housing and slump in consumer confidence to the weakest since 1980. Businesses have also cut payrolls for five consecutive months.

`A Crawl'

``Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply,'' the minutes aid. ``The outlook for business spending remained decidedly downbeat.''

Construction of U.S. single-family houses in April dropped to the lowest level in 17 years, the Commerce Department said last week. Residential investment, a component of gross domestic product, has declined for nine consecutive quarters.

Fed officials are also contending with a surge in oil prices that has both depressed confidence and spending on other items and pushed up inflation.

Crude oil surpassed $133 a barrel today for the first time and has climbed about 37 percent this year. Food prices rose at a 6.1 percent annual rate for the three months ending April, according to the Bureau of Labor Statistics.

The Labor Department's gauge of consumer prices rose 3.9 percent in the 12 months ending in April, the sixth straight month that the rate exceeded 3.5 percent.

``Participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term,'' the minutes said.

The Reuters/University of Michigan Survey of households showed inflation expectations for the coming 12 months rose to 5.2 percent in May, the highest level since 1982. Consumers' estimate for price gains over the next five years increased to 3.3 percent, the fastest since 1996.