Skip to main content

The rift between hawk and dove widened somewhat at the May 3 meeting of the

Federal Open Market Committee

, but the majority of the Fed's concern remains overwhelmingly directed at inflation.

"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," the minutes read.

"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."

Fed members, it should be recalled, were reflecting on March and April data, including a weak March employment report and anemic retail sales, as well as continued evidence of mounting price pressure.

"We need to remember that this meeting occurred three weeks ago, when the inflation picture looked higher and growth seemed weaker," says Lehman Brothers chief U.S. economist Ethan Harris.

The FOMC carried out its eighth straight quarter-point interest rate following the May meeting, pushing up fed funds to 3%. As always, some FOMC members were more worried than others about the economy's current tone -- particularly inflation.

"Participants voiced concerns about recent price trends; they expected inflation to remain contained but also perceived that the risks to that inflation outlook now might be skewed somewhat to the upside," the minutes showed. "Core measures of price inflation had moved up over recent quarters and particularly so over the last few months. A discernible upcreep was apparent in survey measures of short- and, to a limited extent, long-term inflation expectations over recent months."

Since the meeting, strong April employment and retail sales numbers have altered the outlook on economic growth, while a tame April consumer price index eased concerns over inflation. "The data vindicated the Fed's comments at the time, that the economy was going through a transitory soft patch," Harris says.

As disclosed at the time of the meeting, the quarter-point rate hike was approved unanimously.

"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," the minutes read. "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."

Even rising inventories, which some economists predicted would slow growth and employment in coming quarters, were dismissed by the Fed as mostly affecting current production, but not in a significant or lasting manner.

Overall, the market paid little heed to the minutes Tuesday, with a bout of profit-taking continuing after the strong gains posted recently. The

Dow Jones Industrial Average

was recently up 39 points to 10,484, roughly where it stood before the minutes hit.

Even with April's data, the market might not be fully accounting for the Fed's determination to continue tightening interest rates. Current expectations are that the Fed will hike once or twice more this year before possibly foregoing more moves.

No signs of the Fed softening resolve were seen in the minutes.

It is notable that the Fed's minutes mentioned concerns about speculation in real estate, a theme that Fed Chairman Alan Greenspan also addressed on Friday. "The Fed approaches this as an indirect indicator of future inflation, one that could lead to overheating consumption, but not a sign of core inflation trends," says Harris.

"But they probably are concerned that they're not getting much restraint on

the housing front," the economist says. Stubbornly low long-term Treasury yields are keeping mortgage rates low and further fueling the red-hot housing market. "That's therefore another hawkish signal for the Fed," Harris says. He predicts the Fed will nudge its key rate to 3.75% by year end and by 4.25% next year.