Inflation Worry dominated May 10 FOMC meeting

At their policy meeting earlier this month, Federal Reserve officials appear very worried about rising prices and expectations among consumers that prices will rise further, according to a summary of their meeting released TODAY ( WEDNESDAY)

At its May 10 meeting the FOMC voted to raise its target for the federal-funds rate to 5.0% from 4.75%. It was the 16th consecutive quarter-point increase since June 2004.

According to the summary, Fed officials even debated whether to increase the funds rate by 50 basis points at the meeting, although there was also discussion about leaving policy unchanged.

But recent price developments clearly had the central bankers' attention.

FOMC members expressed "some concern" about recent price developments, with core consumer inflation rising a little higher than they had expected.

---- SO THIS TELLS NO INCREASE IN RATES... THERE WILL BE PAUSE...

Several members said that core inflation "was now around the upper end of what they viewed as an acceptable range."

They were also worried that a number of factors could give inflation momentum including a surge in energy and commodity prices and weakness in the dollar.

A close reading of the minutes suggests a heated debate about inflation expectations.

In the end, the FOMC agreed that inflation expectations "had risen somewhat -- a development that would have to be taken into account in policymaking and warranted close monitoring."

At the same time, some FOMC members argued that the pick-up in expectations was "relatively small."

After discussion, it was finally agreed that the FOMC statement should continue to say that inflation expectations were "contained."

Although some FOMC members were worried about "downside risks" to economic growth, especially from high interest rates on the housing sector, these concerns appear to have been drowned out by the discussion of higher prices.

Even with the heightened inflation concern, FOMC officials were open-minded about whether or not to hike rates in June.

"Given the risks to growth and inflation, FOMC members were uncertain about how much, if any, further tightening would be needed after today's action," the summary said.

Given the risks of inflation, the FOMC decided to repeat in their policy statement that "some further policy firming may yet be needed."

The FOMC agreed to modify that statement somewhat by adding "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."

This is a signal that the FOMC decision in June will depend on the incoming economic data, especially the numbers that come in over the next four weeks before the June 29-30 meeting.

Economists said this was designed to give policymakers maximum wiggle room at the June meeting.

THE COMMITEE THINKS TO PAUSE IN JUNE