WASHINGTON -- Federal Reserve officials reverted to a purely neutral policy on short-term interest rates when they met Aug. 17, according to minutes of the Federal Open Market Committee released on Friday.
The action came on a 12-to-0 vote and eliminated a policy bias toward a tighter monetary policy adopted by the FOMC in May after early-year inflation statistics rattled the bond market.
But the committee indicated that Fed officials still expect to have to raise rates at some point in the future, saying, "Monetary policy probably would have to move in the direction of restraint at some point to resist any incipient tendency for inflationary pressures to intensify.
"For now, the relatively slow economic expansion in the first half of the year, the fiscal restraint associated with the deficit reduction legislation, other obstacles to economic growth, and the encouraging inflation statistics for, recent months argued against any near-term policy adjustment," the minutes say.
Many committee members argued that real short-term rates "were at very low levels, indeed slightly negative by some calculations, and while real intermediate-and long-term interest rates were higher, it was apparent that monetary policy was in an accommodative posture," the minutes say.
Fed officials also dismissed fears that low short-term rates at banks and other financial institutions are causing a bubble in stock and bond markets by sending investors scurrying into higher-yielding mutual funds.
"There was no compelling evidence that current monetary policy was fostering credit flows usually associated with speculative excesses or impending increases in price pressures," the minutes say.
But officials agreed that low short-term rates were contributing to "large shifts of funds from depository institutions" into stock and bond funds.