Updated from 2:26 p.m. EDT
A debate is brewing at the
about whether monetary policy is at risk of becoming too restrictive, minutes of the policymaking Federal Open Market Committee's March 27 and 28 meeting showed Tuesday.
Fed members generally agree that after 15 consecutive quarter-point rate hikes, rates are nearing a neutral level and should now be determined by the character of incoming economic data, the notes showed. But among the Fed's voting members, the level of comfort with the prospect of future tightening seems uneven.
"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy," the minutes read. "However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance."
Moreover, the minutes suggest that some members are leery of spooking financial markets with too-hawkish a tone. "Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near," the notes read.
Regarding the policy statement released at the conclusion of the meeting, "Some members expressed concern that retention of the phrase 'some further policy firming may be needed to keep the risks...roughly in balance' could be misconstrued as suggesting that the committee thought that several further tightening steps were likely to be necessary," the minutes showed.
The sentiment is similar to arguments voiced earlier Tuesday by San Francisco Fed President Janet Yellen, who
said in a speech that she plans to be "highly alert to the possibility of the policy tightening going too far." Yellen played down the likelihood of labor or commodity inflation seeping into the larger economy and said current rate policy is close to neutral.
Last month's two-day meeting, the first convened under new Chairman Ben Bernanke, ended with the official fed funds rate going to 4.75%, its highest level since April 2001. In an accompanying policy statement, the committee retained language stating that further tightening might be needed, depending on incoming data.
"The committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the FOMC said on March 29 in a reprise of previous language. In another dovish gesture highlighting the proximity of "neutral" policy, the Fed said on March 29 that "economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace."
Apparently, the latter statement was a matter of some controversy.
"With regard to the committee's announcement to be released after the meeting, members expressed some difference in views about the appropriate level of detail to include in the statement. In the end, they concurred that the statement should note that economic growth had rebounded in the current quarter but that it appeared likely to moderate to a more sustainable pace in coming quarters," the minutes say.
"Policymakers agreed that the announcement should also highlight the favorable outlook for inflation and summarize their reasons for that assessment, but that it should reiterate that possible increases in resource utilization, along with elevated levels of commodity and energy prices, had the potential to add to inflation pressures," they said.