The minutes from the May 10 FOMC meeting were released today. Here are some quotes:
Meeting participants expressed some concern about recent price developments and their implications for inflation prospects. Core consumer inflation lately had been a little higher than expected... Participants noted that prices of non-energy commodities, such as industrial metals and building supplies, also had been climbing. The recent decline in the dollar was another factor that could add to inflation pressures... Business contacts had reported continued shortages of certain types of skilled labor and related wage pressures in some occupations, which would tend to boost costs.
However, participants also cited some factors that could be expected to restrain inflation. Although alternative measures of labor compensation provided divergent readings, growth of total compensation on balance appeared to remain moderate. And, even if nominal wages should accelerate somewhat, ... recent experience suggested that this might be accomplished in part through further productivity gains, which had remained fairly strong on balance in recent quarters, rather than through more rapid price hikes.
Participants discussed in some detail inflation expectations... Some surveys suggested that inflation expectations had risen in recent weeks, but others implied that expectations were little changed. ... On balance, participants judged that inflation expectations had risen somewhat--a development that would have to be taken into account in policymaking and warranted close monitoring--but remained contained.
Although the Committee discussed policy approaches ranging from leaving the stance of policy unchanged at this meeting to increasing the federal funds rate 50 basis points, all members believed that an additional 25 basis point firming of policy was appropriate... Core inflation recently had been a bit higher than had been expected, and several members remarked that core inflation was now around the upper end of what they viewed as an acceptable range. ... At the same time, members also saw downside risks to economic activity. For example, the cumulative effect of past monetary policy actions and the recent rise in longer-term interest rates on housing activity and prices could turn out to be larger than expected. ...
Given the risks to growth and inflation, Committee members were uncertain about how much, if any, further tightening would be needed after today's action. In view of the risk that the outlook for inflation could worsen, the Committee decided to repeat the indication in the policy statement released after the March meeting that some further policy firming could be required. However, the Committee agreed to emphasize that "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information." Members debated the appropriate characterization of inflation expectations in the statement. Low and stable inflation expectations were key to the attainment of the Committee's dual objectives of price stability and maximum sustainable economic growth. However, the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the range seen over the past couple of years, and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as "contained."
This makes it clear, once again, that incoming data will determine the next move. While I get the sense they are looking for a reason to pause, recent data have piled up on both sides of the scale confusing the picture, and there have been some worrisome signs of inflation. Hopefully data that arrive between now and the next meeting will add clarity to whether another rate hike will be necessary. As William Poole says, there's no need to make a call now:
"I don't think it makes any sense for me to think real hard right now about what my policy position is going to be," William Poole, president of the St. Louis Fed, said May 18. "I will reach that conclusion when I have all the data in hand."