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Fed lacked consensus on latest rate cut

Jeremy Simon

Earlier today, the Federal Reserve released the minutes from its March 18 meeting, following the usual lag between when the central bank makes monetary decisions and the sharing of the discussion that accompanies those decisions. Based on the latest set of minutes, the Fed experienced some internal disagreement regarding its move last month to cut interest rates by three-quarters of a point to 2.25 percent.

“With the uncertainties in the outlook for both economic activity and inflation elevated, members noted that appropriately calibrating the stance of policy was difficult, partly because some time would be required to assess the effects of the substantial easing of policy to date,” the Fed said.

Amid this uncertainty, the central bank was unable to reach a consensus. Dallas Federal Reserve Bank President Richard Fisher, who had solely opposed the Fed’s January rate cut, was this time joined in his dissention by Philadelphia Federal Reserve Bank President Charles Plosser. (Overall, officials voted in favor of the rate cut 8-2.)

Fisher and Plosser indicated that “in light of heightened inflation risks, they favored easing policy less aggressively.” They also expressed concerns that ongoing monetary policy easing in the current environment could result in the possible unhinging of inflation expectations — which is only moderately less painful than it sounds. Their dissent marked the first time two Fed officials opposed a rate decision since September 2002.

Sounding a dour note on current economic prospects, the minutes noted that “many participants thought some contraction in economic activity in the first half of 2008 now appeared likely.” Certain Fedsters expect an even bleaker picture. “Some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated,” the Fed said.

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