Federal Reserve worried on inflation

US Federal Reserve officials agreed at their December meeting inflation was the main concern, but some felt the "subdued tone…

US Federal Reserve officials agreed at their December meeting inflation was the main concern, but some felt the "subdued tone" of economic data meant risks to growth had increased, minutes released last night showed.

"Several members judged that the subdued tone of some incoming indicators meant that the downside risks to economic growth in the near term had increased a little and become a bit more broadly based than previously thought," said the minutes of the December 12th meeting.

"Nonetheless, all members agreed that the risk that inflation would fail to moderate as desired remained the predominant concern," the minutes added.

The Fed's concern over potentially slower growth helped boost investor expectations the central bank may cut interest rates in 2007, boosting US Treasury debt prices and US rate futures.

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Stocks reversed gains and ended little changed on the day, and the dollar also pared gains but was up on the day.

The US central bank at the December 12th meeting held benchmark interest rates steady at 5.25 per cent, renewing a warning on inflation but also nodding to "mixed" economic signals and a "substantial" housing slowdown.

The minutes showed one member of the policy-setting committee was concerned enough about growth to favour a statement saying monetary policy could be adjusted in either direction.

The statement the Fed issued last month said only that additional firming - increases in interest rates - might be necessary to address risks from inflation.

Participants in the Federal Open Market Committee meeting said the slowdown in the housing sector continued to weigh heavily on economic activity in the United States.

Although there was evidence that home sales might be stabilising, residential investment was likely to fall further in coming quarters as builders reduced inventories, officials felt.

The housing slowdown has not spilled over significantly into consumer spending, but "considerable uncertainty" surrounding housing activity meant its impact on spending could eventually become more evident, especially if house prices decline significantly, officials said.

At the same time, central bank officials said a slowdown in business investment and production, along with high inventories for automobiles and in other sectors, added to a picture of slowing economic expansion.