U.S. Federal Reserve Board chairman Ben Bernanke's outward calm over inflation masks an increasingly vigorous debate within the central bank about the risk of a sudden surge in prices.
The minutes of the latest meeting of Fed policy makers show there is some doubt about the prevailing view that there is little reason to worry about inflation when unemployment is elevated and factories are operating well below their maximum potential.
"The importance of resource slack as a factor influencing inflation was debated, and some participants suggest that other variables, such as current and expected rates of economic growth, could be useful indicators of inflation pressures," Fed secretary Bill English wrote in his summary of the Jan. 25-26 meeting, which was released Wednesday in Washington.
Mr. Bernanke and the 10 other members of the Federal Open Market Committee voted unanimously to carry on with their plan to buy $600-billion (U.S.) of longer-term Treasury securities through June. That reflects the concern among Fed officials over an unemployment rate that is stuck at about 9 per cent, even as they revised their outlook and forecast stronger economic growth.
The Fed seeks an unemployment rate closer to 5 per cent, which is why most economists predict Mr. Bernanke will spend all $600-billion. Still, evidence of growing worries about inflation at the central bank will douse speculation that policy makers will increase the size of their asset-purchase program, called quantitative easing.
"Nothing in the minutes suggests the Fed will not complete its current QE program, though it is equally unlikely to extend the asset purchases beyond the current planned mid-year date," said Sal Guatieri, a senior economist at BMO Nesbitt Burns in Toronto.
Fed officials revised their economic forecasts at the meeting, predicting gross domestic product, adjusted for inflation, would expand 3.4 per cent to 3.9 per cent in 2011, compared with a November estimate of 3 per cent to 3.6 per cent. In 2013, the FOMC foresees economic growth of 3.7 per cent to 4.6 per cent.
The Fed's policy-setting group now sees risks to its outlook as "balanced," a shift that means the central bank believes there is as great a chance that its economic forecast could be too slow as there is that it could be too high.
Officials noted that household spending had picked up in the fourth quarter, industrial production had posted "solid" gains, and business investment in equipment and software continues to rise.
But policy makers expressed dismay over the labour market, which they said is improving only gradually. The members of the FOMC predict the unemployment rate will be between 6.8 per cent and 7.2 per cent in 2013, well above the central bank's preferred range of 5 per cent to 6 per cent.
Mr. Bernanke told lawmakers last week that unemployment remained his biggest concern, saying he won't feel comfortable that the recovery has taken hold until he sees the jobless rate come down.
He dismissed suggestions that the Fed's asset purchases are creating inflation by flooding the economy with cheap money. "Overall inflation is still very low," Mr. Bernanke said at the House budget committee. "We do not now have a problem."
The Fed's new forecasts explain Mr. Bernanke's lack of concern.
The predictions for economic growth, the unemployment rate and inflation are based on submissions from the six members of the Board of Governors and the 12 presidents of regional Fed banks. The three highest and three lowest estimates for each variable are discarded to create a central tendency.
Despite their outlook for stronger economic growth, most Fed officials expect price increases to remain tame: The forecast for the personal consumption expenditure index - the central bank's preferred measure of inflation - is between 1.3 per cent and 1.7 per cent in 2011, compared with 1.1 per cent and 1.7 per cent in November. The new forecast is below the Fed's unofficial inflation target of 2 per cent.
Still, that outlook is unlikely to make inflation fears go away. The Labor Department's producer price index, a measure of wholesale costs, rose for the seventh consecutive month in January on higher commodity prices. The core measure, which subtracts food and energy prices, rose 0.5 per cent, the biggest one-month increase since October, 2008.
"This should add to investor concerns about inflation driven by commodity prices," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.
The Fed minutes indicated that it's only a "few" members of the FOMC who have serious concerns about inflation. But that's more than at most policy discussions last year. Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser, both of whom have expressed doubts about quantitative easing, joined the FOMC as voters in January.
Most policy makers were of the view that the economy, while stronger, remains too weak to stoke inflation. But a minority questioned that view. Some members worried that businesses, which had little ability to increase prices during the recession, might lift them "substantially once they found themselves with sufficient pricing power."