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Welcome to USA FINANCE,
subject bond funds
By Glenn Somerville WASHINGTON (Reuters) - The U.S. Federal Reserve believed interest rates were too low to forestall inflation even after it raised borrowing costs in December, according to minutes of that meeting released on Tuesday. "Even with this action, the current level of the real funds rate target remained below the level it most likely would need to reach to keep inflation stable and output at its potential," said the minutes of the Dec. 14 meeting, clearly pointing to more rate rises this year. The central bank's wariness about inflation sent stock and Treasury bond prices lower as investors saw the Fed indicating higher borrowing costs ahead -- although economists did not see any change in the gradual pace of rate rises. "A number of participants cited the recent depreciation of the dollar on foreign exchange markets, elevated energy costs and the possibility of a slowing in underlying productivity growth as factors tending to boost the upside risks to their inflation outlook," the minutes of the Dec. 14 meeting said. But they added: "On net, they saw the risks to stable underlying inflation as still balanced." At the Dec. 14 meeting, the Fed raised rates for a fifth time in the space of six months, up another quarter-percentage point to 2.25 percent. The U.S. central bank is widely expected to continue raising them when the FOMC next meets on Feb. 1-2. Financial markets and economists concluded the minutes meant the Fed's policy of gradually bringing rates up from low current levels will continue for some time. The minutes said some meeting participants also felt the prolonged stretch of cheap credit may have prompted "potentially excessive" risk-taking in financial markets -- citing narrow credit spreads, as well as an increase in initial stock offerings, mergers and speculative demand in the residential real estate market. "Basically what they're saying is that given the rate in the bond market, people are taking excessive risk," said Christopher Low, chief economist at FTN Financial in New York. "Some members said the economy is close to potential, which suggests we might soon see inflation pressures take hold. All in all, I'd say it's considerably more hawkish than what we've seen." The minutes were the first released under a new policy adopted at the Dec. 14 gathering to speed up publication by issuing minutes three weeks after each of the eight-times-a-year meetings are held. Continued ...
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