THE FED: Inflation Worry Dominated May 10 FOMC Meeting
By Greg Robb
WASHINGTON (Dow Jones) -- At their policy meeting earlier this month, Federal
Reserve officials appear very worried about rising prices and expectations
among consumers that prices will rise further, according to a summary of their
meeting released Wednesday.
At its May 10 meeting the FOMC voted to raise its target for the
federal-funds rate to 5.0% from 4.75%. It was the 16th consecutive
quarter-point increase since June 2004.
According to the summary, Fed officials even debated whether to increase the
funds rate by 50 basis points at the meeting, although there was also
discussion about leaving policy unchanged.
But recent price developments clearly had the central bankers' attention
"The general tone of the commentary is consistent with policy tightening not
being done at 5.00%," said Josh Shapiro, chief U.S. economist at MFR Inc.
Shapiro said the FOMC also hinted it was not done when it said "modest
further policy action, including a 25 basis point firming today," would
moderate growth and keep inflation contained.
Treasury price losses mounted after the minutes were released.Expectations of
a rate hike in June increased sharply.
The stock market trading was choppy after the minutes were released, with
investors unsure what the message was for future rate hikes.
At the May 10 meeting, FOMC members expressed "some concern" about recent
price developments, with March core consumer inflation rising a little higher
than they had expected.
Several members said that core inflation "was now around the upper end of
what they viewed as an acceptable range."
Since the May 10 meeting, the Fed has had a look at the April consumer price
data, which was above expectations.
The overall consumer price index rose 0.6% in April, and the core rate was up
0.3%, boosted by the higher cost of rents.
"If the hawks were concerned on May 10 ... then they must be in 'hair on
fire' mode now," said Steve Stanley, chief economist at RBS Greenwich Capital.
They were also worried that a number of factors could give inflation
momentum, including a surge in energy and commodity prices and weakness in the
dollar.
A close reading of the minutes suggests a heated debate about inflation
expectations.
In the end, the FOMC agreed that inflation expectations "had risen somewhat
-- a development that would have to be taken into account in policymaking and
warranted close monitoring."
At the same time, some FOMC members argued that the pick-up in expectations
was "relatively small."
After discussion, it was finally agreed that the FOMC statement should
continue to say that inflation expectations were "contained."
Paul McCulley, managing director of Pacific Investment Management Co., said
the minutes were "a little on the hawkish side" because of their focus on
rising inflation expectations.
Although some FOMC members were worried about "downside risks" to economic
growth, especially from high interest rates on the housing sector, these
concerns appear to have been drowned out by the discussion of higher prices.
Even with the heightened inflation concern, FOMC officials were open-minded
about whether or not to hike rates in June.
"Given the risks to growth and inflation, FOMC members were uncertain about
how much, if any, further tightening would be needed after today's action," the
summary said.
Given the risks of inflation, the FOMC decided to repeat in their policy
statement that "some further policy firming may yet be needed."
The FOMC agreed to modify that statement somewhat by adding "the extent and
timing of any such firming will depend importantly on the evolution of the
economic outlook as implied by incoming information."
This is a signal that the FOMC decision in June will depend on the incoming
economic data, especially the numbers that come in over the next four weeks
before the June 29-30 meeting.
Economists said this was designed to give policymakers maximum wiggle room at
the June meeting.
But many economists have noticed a shift in Fed language in recent weeks
towards the possibility of more rate hikes and away from the notion that the
committee may pause.
Stanley of RBS said the odds now slightly favor another rate hike at the end
of June.
(END) Dow Jones Newswires
05-31-06 1840ET
Copyright (c) 2006 Dow Jones & Company, Inc.
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