Federal Reserve officials became markedly more worried about inflation last month, with some pushing to raise interest rates faster than originally planned, according to minutes from their policy meeting in December.
The minutes, released on Tuesday afternoon, caused a quick sell-off in the stock market as investors worried that interest rates could rise faster and growth become slower than they had expected.
Among other things, the minutes suggested a growing unease among policy makers about the weakness of the dollar, high oil prices, slowing growth in productivity and high budget deficits.
In a sign of a growing split among members of the Federal Open Market Committee, which sets interest rates, some officials pushed unsuccessfully for the central bank to drop its oft-repeated vow to raise interest rates at a "measured" pace.
"There is a notably hawkish shift in these minutes," said Richard Berner, a senior economist at Morgan Stanley. "There is nothing new about the phenomena they are citing, but the fact that they are starting to talk about it is news."
Under a strategy mapped out by Alan Greenspan, chairman of the Federal Reserve Board, the central bank has been nudging up short-term interest rates, pushing them to 2.25 percent on Dec. 14 from 1 percent in June.
Throughout that process, the central bank has said it will raise rates at a "measured" pace. Most analysts are predicting that the federal funds rate, governing overnight loans between banks, will climb to 3.5 percent or slightly higher by the end of this year.
But analysts said the new minutes, which are carefully edited summaries of the closed policy discussions, suggested a growing restiveness among some members.
Fed officials were generally confident about the prospects for reasonably strong economic growth, with no one suggesting the need to spur production with lower rates. But several members pointed to various signals that indicate higher inflation.
"A number of participants voiced concerns about domestic and global financial imbalances," the minutes recounted, referring to both the soaring trade deficit and the federal government's record budget deficit. In a sign of potential trouble for US President George W. Bush, who has vowed to cut the budget deficit in half by 2009, the minutes reported that some Fed officials viewed the chances of significant reduction as "remote."
Fed officials were also pessimistic about a rapid turnaround in the US' huge trade and financial deficit with the rest of the world. The trade deficit is expected to have exceeded US$600 billion last year, a record in dollar terms and as a share of the total economy.
At nearly 6 percent of the nation's gross domestic product, the trade deficit has already prompted a sharp decline in the value of the dollar against the euro and has raised growing fears about the possibility of a more abrupt crash.
According to the minutes, some Fed officials worried that the prolonged policy of cheap money had ignited "excessive risking in financial markets" as well as "speculative demands" in the housing market.
"A number of participants" were also described as citing concerns about the impact of high oil prices. Greenspan and other top officials have generally viewed rises in oil prices as one-time events, but the minutes said policymakers worried that higher oil prices could become "embedded" in the underlying inflation trend.