May 26: Energy Risk - Energy Prices Concern US Fed

Although Federal Reserve policymakers were concerned about energy prices due to broader inflation when they met in early May, they didn't believe they needed to raise short-term interest rates more aggressively.  But according to minutes of the meeting released this past Tuesday, participants voiced concerns about recent price trends.  They expected inflation to remain contained but also perceived that the risks to that inflation outlook now might be skewed to the upside.

Even so, Fed Chairman Alan Greenspan and his colleagues at the May 3 meeting decided to stick with their policy of gradually boosting interest rates to keep inflation and the economy on an even keel.  At the May meeting, the Fed raised rates by one-quarter percentage point to 3 percent.  To reflect that it had grown more concerned about inflation from its previous meeting in March, the Fed in May dropped language that had been in the March statement.  The March language had noted that the rise in energy prices had not fed into "core" consumer prices, which track a broad range of prices except for energy and food costs. 

On Wall Street, investors appeared to draw some comfort from the Fed's assessment of economic conditions.  Fed policymakers at their meeting in May expressed hope that a recent moderation in energy prices, along with a labor market that didn't appear to be spurring wage inflation, would mean that inflation wouldn't become a problem to the economy.  "On balance, measures of core inflation were thought likely to remain in check over the remainder of this year and next," the Fed minutes said.

High energy prices had crimped consumer and business spending.  The economy grew at a 3.1 percent annual rate in the first three months of 2005, the slowest pace in two years.  Oil prices skyrocketed into record territory in March and closed at a new peak of $57.27 a barrel at the beginning of April.  While the Fed blamed high energy prices for the economic slowdown, it didn't seem overly worried by it. "Most members regarded the recent slower growth of economic activity as likely to be transitory," the minutes said. Economic reports released after the Fed's May 3 meeting have flashed signals of renewed economic strength.  In fact, even with the recent rate increases, all members agreed that interest rates still remained "too low," according to the minutes.