Fed Is Unsure How High to Go

Federal Reserve policymakers were unsure how much more they would need to raise interest rates, if at all, after their May 10 meeting, according to minutes of that gathering released Wednesday.

Fed members debated policy approaches that ranged from doing nothing to raising interest rates half a percentage point at the meeting, the minutes said. In the end, the central bank’s Open Market Committee decided a quarter-point increase would be appropriate to keep inflation from rising and promote a sustainable economic expansion.

“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,” the minutes said.

The Fed saw several factors contributing to a greater risk of inflation, such as a surge in energy and commodity prices and the weaker dollar. But the central bank also saw the potential for a slowdown in economic growth as previous rate increases and a cooling housing market took their toll.

The Fed raised its benchmark short-term interest rate to 5% at the meeting, the 16th consecutive hike. In announcing its decision, the central bank emphasized that future moves would be highly dependent on how the economic outlook unfolded.

Analysts and traders took the release of the minutes as a sign the Fed is likely to raise interest rates at its June 28 and 29 meeting. U.S. rate futures fell, indicating a higher chance of a rate hike.

Analysts say the Fed notes show that policymakers are worried about inflation and leaning toward more rate increases despite uncertainty about going too far. “They have expressed concern about inflation pretty clearly in their deliberations,” said Alex Beuzelin, a senior market analyst for Ruesch International in Washington.

“While these minutes won’t make or break the case for a rate hike

At the May meeting, monetary policymakers held a detailed discussion on an upswing in inflation expectations, which they said they would have to watch closely and take into account in decisions about interest rates. They concluded the pickup in inflation expectations, though worrisome, was small, and that led them to characterize expectations as “contained” in the policy statement issued after the meeting.

Inflation expectations “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,’ ” the Fed said.