Fed members differed on rate rise message

By Andrew Balls
FT.com

Federal Reserve policy-makers differed in their May meeting on the wisdom of providing the assurance that the US central bank is likely to raise interest rates at a "measured" pace and on their assessment of the pace of underlying inflation.

The Federal Open Market Committee's minutes show that all members agreed the Fed should drop the assurance that the Fed would be "patient" in raising interest rates.

But the committee discussed "at length" the best way to communicate its intentions, before settling on the formulation that it was likely it would be able to raise rates at a "measured" pace.

"A number of policymakers were concerned that such an assertion could unduly constrain future adjustments to the stance of policy," the minutes show. Others noted that the Fed's actions would be determined by the data rather than by its current expectations of these developments.

While members of the Washington-based board of governors have placed greater emphasis on the benefits of a gradualist approach to raising rates, at a time when inflation is relatively low, some regional Fed presidents have expressed concerns about a strategy that might limit the Fed's room for manoeuvre at a time of rising inflation.

At its meeting this week, at which it raised the federal funds rate by a quarter point to 1.25 per cent, the FOMC qualified its statement that it was likely it would be able to raise interest rates at a measured pace, seen as a commitment by market participants to move in quarter-point rather than half-point increments.

"Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfil its obligation to maintain price stability," the statement said, a move that gives the FOMC greater flexibility to shift to a more aggressive pace of rate increase if it needs to.

"Most members saw low inflation as the most likely outcome," the minutes said, while also making clear the uncertainty among policymakers about the extent to which a sharp rise in inflation in the first half of the year reflected temporary factors rather than an upturn in underlying inflation.

Some view underlying inflation as relatively stable, but others "were less confident about the degree of restraint on prices, noting that inflation predictions based on estimated output or employment gaps were subject to considerable error".

A significant number of members reported evidence that businesses were finding it easier to raise prices and pass on cost rises, the minutes said.

At the meeting the FOMC agreed that inflation risks were balanced, having previously tilted towards concern about disinflation.

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