Fed Minutes Show Inflation Debate

Federal Reserve officials judged that the U.S. economy was gaining traction when they met three weeks ago, but highlighted the potential negative impact of rapidly rising commodity prices on inflation expectations, consumer spending and business investment.

At the meeting, the Fed maintained its easy-money policies while offering reassuring words about the economic outlook and signaling vigilance on inflation.

Officials at the meeting indicated increasing energy and commodity prices had fed a recent boost in headline inflation, but expected that rise to be temporary. They showed some concern, though, that businesses and consumers may not feel the same way.

“Accordingly, participants considered it important to pay close attention to the evolution not only of headline and core inflation but also of inflation expectations,” the minutes said.

Fed officials also discussed new sources of uncertainty in the economy, noting that “unfolding events in the Middle East and North Africa, along with the recent earthquake, tsunami, and subsequent developments in Japan, had further increased uncertainty about the economic outlook.”

Despite some risks, Fed officials said the economy is on firmer footing, with unemployment declining while consumer spending and business investment show signs of strength. The Fed also maintained its easy-money policies.

The Fed dropped its short-term interest rate target nearly to zero in December 2008 during the financial crisis, and last month reiterated that it would keep it there for “an extended period.”

And last year the central bank started $600 billion of Treasury bond purchases in an effort to further stimulate the economy. That program, known as quantitative easing, is set to end in June.

“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011,” the minutes said.

The minutes noted that the Fed is planning for the eventual exit from the current, exceptionally accommodative monetary policy.

“In light of uncertainty about the economic outlook, it was seen as prudent to consider possible exit strategies for a range of potential economic outcomes,” the minutes said.

Since the March 15 meeting, several officials from regional Fed banks have spoken out with varying degrees of concern about the outlook for inflation and growth, indications that a vocal minority may want to cut the bond program short and start raising interest rates soon.

Minneapolis Fed President Narayana Kocherlakota last week said the Fed may need to increase short-term interest rates by year’s end if underlying inflation rises as he anticipates. Mr. Kocherlakota said he expected “a big upward movement” in core inflation–which excludes volatile food and energy prices–from about 0.8% late last year to about 1.3% by year-end.

But Fed Chairman Ben Bernanke Monday played down inflation fears, saying the rise in global commodity prices is likely to be temporary and shouldn’t translate into a broader inflation problem. The Fed chief was quick to add that if his prediction is wrong and inflation begins to mark strong gains, the central bank would respond.

Congress has given the Fed a dual mandate: to maintain low unemployment and stable inflation. Unemployment last month was 8.8% and inflation remains below its objective of 2%.

Write to Jeffrey Sparshott at jeffrey.sparshott@dowjones.com and Jeff Bater at jeff.bater@dowjones.com