Fed Minutes Say the End is Near

The FOMC meeting minutes for Bernanke's first meeting as chair were released. If you are looking for evidence the Fed will move to 5% and then pause, it's there. But if you feel there is a chance rates will go higher, statements about being vigilant toward inflation expectations and about risks being tilted slightly toward worry about inflation give support for that position as well. Putting the two together, the Fed wants us to get their message, repeated frequently lately with Janet Yellen as the latest messenger, that further rate moves beyond the move to 5% at the next meeting are data (and I would add forecast) dependent:

Fed Members Saw End of Rate Rises Likely 'Near' in March, Minutes Show, Bloomberg: Most Federal Reserve policy makers considered the end of their interest rate increases ''was likely to be near,'' while also citing the need for vigilance against inflation, minutes of their March meeting showed.

''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,'' the record ... said. ''Members also recognized that in current circumstances checking the upside risks to inflation was important.'' Fed officials are now basing rate decisions on what incoming data say about their forecast of slower economic growth in the second half of 2006...

''I don't think there's any doubt they'll go to 5 percent in May,'' former Fed governor Lyle Gramley said in an interview. ''I expect them to sit still after that.''

Additional tightening, the minutes said, ''would be determined by the implications of incoming information for future activity and inflation.'' The Federal Open Market Committee also held discussions on the statement they issued after the meeting, including the phrase ''some further policy firming may be needed.''

Some members worried that the language, ''could be misconstrued as suggesting that the committee thought that several further tightening steps were likely to be necessary,'' ... ''Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data.''

San Francisco Fed President Janet Yellen said today she's ''highly alert'' to the chance policy makers may lift rates too high. ...

Here's a bit more on Yellen's speech from the WSJ:

Minutes Show Policy Makers Thought Rate Moves' End Near, by Greg Ip, WSJ: ...While inflation risks are "tilted slightly to the upside," she also said she was "increasingly concerned about the well-known long and variable lags in monetary policy -- specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected," in particular on housing. "I will be highly alert to the possibility of the policy tightening going too far."

Ms. Yellen said new data will change her views only if they surprise her -- for example by showing no slowing in growth, a rise in inflation or a more drastic pullback in housing. "It's not really data dependence, but more accurately, data-surprise dependence" that drives her forecast, she said.

I read that as saying fairly explicitly she is going to advocate a pause at 5% unless there are data surprises. As previously noted, I agree with her worry about lags in policy. The WSJ report also reinforces Bloomberg's analysis:

After raising interest rates in late March, Federal Reserve officials concluded they were almost done in the lengthy process of tightening monetary policy, the meeting's minutes show.

Released Tuesday, the record gave the strongest signal yet that an expected rate increase by the Fed at its next meeting May 10 may be the last for some time.

Update: Is today's CPI inflation report bad enough news to change the Fed's course? As David Altig says (as he notes qualifications to the report in both directions, but still does not like the overall picture), we shall see. This isn't the last data the Fed will see between now and the time when the decision to move past 5.00% must be made, so the Fed has no need to make that call yet. It's also worth noting that due to policy lags, recent tightening is not fully reflected in this month's data.