FOMC minutes

Click here for the minutes of the May 3 meeting.

Some highlights:

Partly in response to the receipt of weaker-than-expected data for spending and output in the first quarter, the staff marked down somewhat its forecast of economic growth for 2005 and 2006.

...

In their discussion of current conditions and the economic outlook, meeting participants observed that incoming data over the intermeeting period hinted at possible upside risks for inflation and downside risks for economic growth. Earlier increases in energy prices seemed to be an important factor contributing to an uptick in core inflation and a slower pace of economic activity. With energy prices leveling out more recently, however, and the behavior of compensation suggesting a lack of pressure in labor markets, underlying inflation appeared to remain contained. The weakness in spending was widespread and could not be completely dismissed, but it had appeared only very recently and could be a product of the inherent noisiness of high-frequency economic data. On balance, economic fundamentals including low interest rates, robust underlying productivity growth, and strengthened business balance sheets were expected to support economic growth at a pace sufficient to gradually eliminate remaining slack in resource utilization. Although the economic outlook generally seemed favorable, there was also broad recognition of greater uncertainty attending the outlook for both inflation and output growth.

I'll quote these three paragraphs in full to avoid any chance of taking them out of context.

In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 3 percent at this meeting. Although downside risks to sustainable growth had become more evident, most members regarded the recent slower growth of economic activity as likely to be transitory. In this regard, the ability of the U.S. economy to withstand significant shocks over recent years buttressed the view that policymakers should not overreact to a comparatively small number of disappointing indicators, especially when economic fundamentals appeared to remain quite supportive of continued solid expansion. To be sure, the Committee had raised its federal funds rate target appreciably over the past year, and, in the view of a few members, a larger-than-expected moderation of aggregate demand in response to this cumulative policy action could not be ruled out. However, all members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run. Against the backdrop of the recent uptick in core inflation and in some measures of inflation expectations, members agreed that they should continue along the course of removing policy accommodation at a measured pace conditional on the outlook for inflation and economic growth.

In discussing the statement to be released after the meeting, members agreed that it was appropriate to acknowledge that rising energy prices seemed to have spurred an increase in core measures of inflation by dropping the reference from the March statement indicating that "The rise in energy prices, however, has not notably fed through to core consumer prices." They likewise all agreed that mention should be made that, on balance, longer-term inflation expectations remained well contained. Regarding the risks to sustainable growth and price stability, some members noted that the risk assessment conditioned on "appropriate policy" no longer seemed to convey useful information regarding the Committee's economic and policy outlook. Although some members noted that a case could be made that the risks to inflation were now somewhat skewed to the upside and those to sustainable economic growth perhaps to the downside, the most likely outcome remained one of stable prices and sustainable growth, and the Committee agreed that it should retain a balanced assessment of risks conditional on appropriate policy.

For many, heightened economic uncertainty in the current environment implied greater uncertainty about the range of possible policy outcomes and placed a premium on flexibility in setting policy at upcoming meetings. Some members commented that this greater uncertainty called for eliminating or paring back forward-looking language from the statement--if not at this meeting, then fairly soon. In the event, most members viewed the forward-looking language in the statement--including the characterization of the stance of policy as accommodative as well as the judgment that policy accommodation could be removed at a pace that is "likely to be measured"--as a reasonable characterization of the policy stance and its likely evolution over time. Moreover, a number remarked that the language in its current form was clearly conditioned on economic developments and therefore would not stand in the way of either a pause or a step-up in policy firming depending on events. In the end, all members agreed to retain the forward-looking language.

This is actually quite interesting and informative. First of all, it should put to rest any misinterpretation of "measured pace." It represents the "likely evolution" and "would not stand in the way of either a pause or a step-up in policy firming depending on events."

Then there is the statement that, "some members noted that the risk assessment conditioned on 'appropriate policy' no longer seemed to convey useful information regarding the Committee's economic and policy outlook." There seems to be some increased support for including language that is a bit more frank about the risks to price stability and sustainable growth. Perhaps the next press release will be more blunt. Perhaps this is the line that the committee really wanted us to read (to prepare the way for more direct language in the future). We'll see in a few weeks.

Other than that, there is little in these minutes that we didn't know already. Nontheless, Wall Street wasn't thrilled (Reuters):

The minutes of the Federal Open Market Committee's May meeting showed the Fed's policy makers believed there was "a discernible upcreep" in inflation, wording that was taken as a sign the Fed would continue its campaign of raising interest rates at a "measured" pace of 25 basis points at a time.

Now, don't tell me that Wall Street learned anything it didn't know already about the "measured pace" business. We've been over that before. Whether Wall Street was more distressed by the possibility of inflation showing a "discernible upcreep" or the markdown of the growth forecast is a question I won't try to answer. But then, 20 points on the DJIA isn't exactly a big drop either.

The 10 year bond gained 7/32 which tells us that the bond market didn't find the inflation news too distressing. On other words, the minutes did nothing to solve Greenspan's "conundrum."

All in all, not much is changed.

UPDATE: The New York Times has this to say:

Participants in the Fed meeting were confronted with a barrage of statistics that suggested slowing growth, but the participants indicated that they felt that any slowdown would be transitory and that they should "should not overreact to a comparatively small number of disappointing indicators."

In hindsight, the decision turns out to have been prescient. In the weeks since the meeting, new data has indicated that job creation, consumer spending and exports have been stronger than originally thought.

Indeed, Wall Street economists have been raising their estimates of growth for the first half of the year. On Thursday, the Commerce Department is expected to revise its estimate of growth in the first three months to 3.5 percent or higher, from 3.1 percent.

UPDATE #2: Mark Thoma comments on the minutes.

UPDATE #3: Macroblog has more.