The FOMC Raises Target Rate to 5.25%

As expected, the Federal Open Market Committee voted today to raise the target federal funds rate to 5.25%. Of more interest are changes in the wording of the Press Release that signal the course of future policy. The key differences from the last statement are:

1. The Fed indicates that new data have validated their previous conjecture that economic growth would moderate. The wording has changed from saying growth is "likely to moderate" to "Recent indicators suggest that economic growth is moderating."

2. The statement upgrades the change in core inflation from modest to elevated. The statement "only a modest effect on core inflation" becomes "Readings on core inflation have been elevated in recent months."

More interesting is the change in the statement regarding underlying inflation pressure from input costs. Whereas before input costs and capacity constraints had the potential to "Add to inflation pressures," now they are seen as having the potential to "sustain inflation pressures." So they don't anticipate further increases in the pressure for prices to rise.

3. They indicate that inflation risks remain, but note that the moderation in aggregate demand should help. But the message is that the risk of inflation has not ended.

4. The San Francisco Fed joins the Kansas City Fed in not asking for an increase in the discount rate, a signal they may not favor a rate increase, though the vote itself was unanimous (with Olson not voting due to his recent resignation).

The statements about aggregate demand slowing and input costs sustaining rather than adding to inflation pressures indicate the Fed sees a fall in the inflation risk, but the statement also makes it clear the Committee is prepared to raise rates again if the forecasts from incoming data indicate inflation pressures are not abating.

Today's Statement	May 10 Statement
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.	[No substantive difference]
Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.	Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.	As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.
Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.	The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.	[Only difference is that Olson did not vote]
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas.	In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco.