FOMC Minutes

Minutes from the May FOMC meeting were released today. Here are a couple of key paragraphs.

Market participants had largely anticipated the FOMC's decision at its March meeting to leave the target federal funds rate unchanged. Nevertheless, the expected path for monetary policy moved lower on the announcement, as investors apparently interpreted the accompanying statement as suggesting that the Committee's economic outlook had become somewhat more balanced. However, subsequent FOMC communications--including the Chairman's testimony before the Joint Economic Committee, speeches by various FOMC members, and the minutes from the March meeting--were generally seen as emphasizing the Committee's concern about upside risks to inflation....

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... Meeting participants anticipated that real GDP would advance at a pace a little below the economy's trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy's trend rate in 2008. Most participants continued to expect core inflation to slow gradually, although considerable uncertainty surrounded that judgment and the Committee's predominant concern remained the risk that inflation would fail to moderate as expected.

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...most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.

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Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation. Although readings on core inflation in March had been more favorable, this followed several months of elevated inflation data and price pressures were not yet viewed as convincingly on a downward trend. Most participants expected core inflation to moderate gradually, fostered in part by stable inflation expectations and a likely deceleration in shelter costs. Some participants also expected the anticipated slight easing of pressures on resources to help nudge inflation lower, although others felt that small movements in resource utilization were unlikely to have discernible effects on inflation. All participants agreed that the risks around the anticipated moderation in inflation were to the upside; and some noted that a failure of inflation to moderate could entail significant costs particularly if it led to an upward drift in inflation expectations.

... Members continued to view the risks to economic activity as weighted to the downside, although with turmoil in the subprime market appearing to have remained relatively well contained and business spending indicators suggesting a more encouraging outlook, these downside risks were judged to have diminished slightly. Members agreed that considerable uncertainty attended the prospects for inflation, and the risk that inflation would fail to moderate as desired remained the Committee's predominant concern.

... While readings on core inflation were lower in March, members felt that it was appropriate to emphasize that core inflation remained somewhat elevated. The Committee agreed that the statement should continue to note that their predominant policy concern was the risk that inflation would fail to moderate as expected, and that future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth.

Look at the number of times that upside risks to inflation is cited as the "predominant policy concern." There is also an acknowledgment that the correction in the housing market is likely to go on "somewhat longer than previously expected."

Also, next month, the FOMC will continue its review of communication issues. It will be interesting to see what comes of that as it is a topic that I have mentioned many times on this blog, and I know that many of my readers are interested. All in all, my expectations for interest rate policy have not changed much in the near term from what I have mentioned in the past. I see the Fed trying to talk down inflation expectations as much as they can while they wait for a clear signal to move. Absent a clear shift in the data, I expect that to continue for a while. But if (when?) that shift comes, there will probably not be a lot of warning.