April 11 (Bloomberg) -- Federal Reserve officials concluded last month that higher interest rates could still be needed even as they removed a reference in their policy statement to tighter credit.

``Further policy firming might prove necessary to foster lower inflation,'' the Fed said in minutes of the Open Market Committee's March 20-21 meeting, released today in Washington. ``But in light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming.''

The minutes contained no hint of a rate cut, which some economists forecast, and suggested that policy makers remained confident that their prediction of an economic rebound would be borne out. Stocks fell and yields on Treasury notes rose.

``What the Fed is telling us in these minutes is that it really has no thoughts at all about easing interest rates at the moment,'' said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. ``It's quite happy to sit where it is now to see how things work out.''

Reservations

Policy makers, who kept their benchmark interest rate at 5.25 percent on March 21, also expressed doubts about their forecast for slowing inflation.

``The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing,'' the minutes said.

The Fed's preferred inflation gauge, the ``core'' personal consumption expenditures price index minus food and energy, has been at or above the top of the comfort zone articulated by at least six Fed officials for almost three years. It rose 2.4 percent for the year to February.

The minutes contained stronger suggestions of rate increases than Bernanke's March 28 congressional testimony, in which the chairman said the Fed retained an ``inflation bias'' and had not moved to a so-called neutral stance.

``The combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize,'' the Fed minutes said.

Language Issues

St. Louis Fed President William Poole, who votes on rates this year, said last week that the statement wasn't ``completely successful'' because ``very well-informed people'' came to different conclusions about its meaning.

``This is a case in which the words, perhaps, were not chosen as carefully as they might have been,'' Gramley said.

Since the meeting, policy makers have stressed their concern that inflation remains too high. Richmond Fed Bank President Jeffrey Lacker today became the third official this week to hold out the prospect of higher interest rates, after Fed Governor Frederic Mishkin and Dallas Fed President Richard Fisher yesterday indicated the central bank may still need to act.

Fed staff economists reduced their first-quarter forecast for U.S. economic growth, the minutes said. The staff expected growth to pick up to a pace ``a little below that of the economy's long-run potential for the remainder of 2007'' and at a similar rate next year. Inflation was projected to be higher in the first half than the prior forecast though would still ``edge down'' through the rest of 2007 and 2008, the minutes said.

``The market thinks they still have credibility,'' said Jay Bryson, global economist for Wachovia Corp. in Charlotte, North Carolina. ``If core prices start to drift up, then their inflation credibility comes into question.''

Restrained Growth

The U.S. economy grew at an annualized pace of 2.5 percent in the fourth quarter, the Commerce Department said March 29, revising the 2.2 percent estimate the Fed had in hand for the March meeting. Growth, hobbled by slumps in home building and in corporate spending that show few signs of abating, was initially calculated at 3.5 percent for the period.

The economy probably expanded at a 2 percent pace in the first quarter, the median estimate of 35 economists surveyed by Bloomberg News. Business spending was ``surprisingly weak'' recently, the Fed minutes said. The International Monetary Fund cut its forecast for U.S. growth this year to 2.2 percent from a September estimate of 2.9 percent. The world's largest economy expanded 3.3 percent last year.

Subprime Woes

The delinquencies and resulting turmoil in subprime mortgages ``likely would constrain home purchases by some borrowers, perhaps retarding the recovery in the housing sector,'' the minutes said. ``However, there was no sign of spillovers from the subprime market to the overall mortgage market.''

The labor market ``remained relatively tight,'' the Fed minutes said. That was two weeks before the Labor Department's monthly jobs report showed that American employers added a greater-than-forecast 180,000 workers in March while the jobless rate fell to 4.4 percent, matching a five-year low and defying predictions it would climb.

``The possibility that labor costs might rise more rapidly was seen as an upside risk to inflation,'' the minutes said.

After the labor report, investors pared bets on an August interest-rate cut. As of yesterday, traders saw about a 27 percent chance the Fed would lower its benchmark rate in August, down from 92 percent on March 21 after the latest statement. Investors see a quarter-point cut by the end of the year as a near-certainty.

Also at the March meeting, Fed policy makers, continuing their discussion of how to improve communication of the central bank's objectives, considered the pros and cons of adopting a numerical inflation goal, a change Bernanke has favored. Officials also discussed the Fed's public economic projections. Fed members did not reach any decisions and agreed to continue the talks at the June 27-28 meeting.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: April 11, 2007 17:21 EDT