Doves Speak at FOMC

Most members believe they're not committed to many more hikes.
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Updated from 2:21 p.m. EST

Most members of the

Federal Reserve

believe they are no longer committed to a "large" number of future interest rate hikes, minutes of the last meeting show.

Notes from the Dec. 13 meeting show the divide between dove and hawk widening on the policymaking Federal Open Market Committee, with members expressing divergent views on the pace of economic growth and the potential for high capacity use and energy prices to ignite inflation. Some consensus was reached on a revision to the Fed's statement about rate policy, with members agreeing to drop language that characterized the Fed as currently "accommodative," a move that suggested they believe current policy is neutral.

"Although future action would depend on the incoming data, this

new characterization of the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large," the minutes read.

Supporting this view were reports showing price pressures leveling off in several sectors.

"Recent data suggested that, thus far, indirect effects of elevated energy prices on core inflation had been muted. Moreover, energy prices generally had fallen back on balance since earlier in the fall, and much of the increases in inflation expectations posted in the aftermath of the hurricanes had reversed," the minutes read.

"Participants noted that robust competition -- including that from foreign producers -- and further substantial gains in productivity were helping to contain cost and price pressures," the minutes said. "Moreover, measures of labor compensation showed only moderate gains while relatively wide profit margins could allow firms to absorb somewhat larger increases in labor and other costs without boosting prices."

The Dec. 13 meeting, at which the fed funds rate was pushed up by a quarter-point for a 13th straight time, to 4.25%, was viewed as a watershed in financial markets. Most observers viewed the omission of the "accommodative" language as a sign the Fed would soon curtail its 18-month-old rate tightening campaign.

Notwithstanding evidence of weakening inflation, some FOMC participants continued to see reasons for vigilance, urging fellow members to rely on incoming data in formulating future policy.

"Surveys and anecdotal reports suggested that some firms were successfully passing at least a portion of their increased costs on to customers, and many participants remained concerned that elevated energy prices could put pressure on core inflation. Also, in the view of a number of participants, the economy was possibly producing in the neighborhood of its potential, and the persistent strength in spending of late suggested that resource markets could tighten further and inflation pressures build. Under these circumstances, and with policy having been accommodative for some time, inflation expectations could rise if monetary policy were not seen as responding to contain such risks.

"Because the committee's actions over the past eighteen months had significantly reduced the degree of monetary policy accommodation, members thought that the policy outlook was becoming considerably less certain and that policy decisions going forward would depend to an increased extent on the implications of incoming economic data for future growth and inflation," the committee said.

Another debate centered around the Fed's vow for "measured" interest rate hikes -- a key policy signal that financial markets have reliably interpreted as a guarantee for another quarter-point interest hike at the next meeting.

"Some members thought that the word 'measured' was no longer necessary, but its retention for this meeting was seen as potentially useful to preclude a possible misinterpretation that the committee now saw a significant possibility of adjusting policy in larger increments in the near future."