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Fed Members Unsure About Next Interest-Rate Decision (Update1)
May 31 (Bloomberg) -- Federal Reserve policy makers were unsure three weeks ago about how much further to raise interest rates and suggested ``worrisome'' inflation expectations may recede, minutes of the last meeting showed.

``Members were uncertain about how much, if any, further tightening would be needed after today's action,'' the Federal Open Market Committee said in records of the May 10 session released today in Washington. ``The apparent pickup in longer- term expectations, while worrisome, was relatively small,'' and the rise ``could well reverse before long.''

The minutes give a fuller picture of deliberations that resulted in the Fed's May policy statement, the first in three years in which the central bank declined to give investors a clear signal about its next rate decision. Fed Chairman Ben S. Bernanke and other members are trying to decide when to suspend the streak of rate increases, now at 16.

``It seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year,'' the minutes said.

After the report, the yield on two-year U.S. Treasuries was up four basis points to 5 percent at 2:06 p.m.

The FOMC voted unanimously at the meeting to raise the benchmark rate to 5 percent from 4.75 percent. Panel members also discussed leaving the rate unchanged or increasing it to 5.25 percent, according to the minutes, which don't say anyone favored those alternatives.

The FOMC has raised the overnight lending rate between banks from 1 percent in the past two years in an effort to contain inflation and reach a so-called ``neutral'' rate that doesn't choke off economic growth.

Kohn-led Committee

In a separate move between the March and May meetings, Bernanke appointed a subcommittee to study communications issues, led by Governor Donald Kohn, with Minneapolis Fed President Gary Stern and San Francisco Fed President Janet Yellen.

Kohn said at the May 10 meeting that the subcommittee's objective was to help the FOMC ``frame and organize discussion of a broad range of such issues over coming meetings,'' according to the minutes' summary.

Earlier today, New York Fed President Timothy Geithner said a central bank ``cannot provide more assurance about the likely future course of policy than it actually has.'' Still, Fed policy makers, facing an ``uncertain world,'' must still be clear in their message to retain their inflation-fighting credibility and flexibility to make decisions.

Forecast for Slowdown

The Fed's internal forecast calls for the U.S. economic expansion to slow after reaching a 5.3 percent annual pace in the first quarter, the fastest pace in 2 1/2 years. Today's minutes said the forecast showed growth ``moderating somewhat from the average pace of the previous several quarters.''

Bernanke, 52, who took over from Alan Greenspan in February, told Congress last month the Fed may take a break from the rate increases even if inflation remains a risk.

``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,'' the FOMC said in its May 10 statement.

Since the meeting, investor expectations have increased for the Fed to raise rates again on June 29. On May 10, traders placed a 40 percent probability on such a move, based on the price of futures tied to the fed funds rate on the Chicago Board of Trade; as of 1:44 p.m. in New York, that had climbed to 62 percent.

There are few signs that inflation is easing. Last week, the government reported that the Fed's preferred price index, a so-called ``core'' measure that excludes food and energy costs, had risen 2.1 percent in the 12 months through April.

Moskow's Concern

That exceeds the zone of 1 percent to 2 percent, desired by Bernanke and several other Fed members. Chicago Fed President Michael Moskow said yesterday that he'd like to see that number be closer to the midpoint of that range. ``Core inflation recently had been a bit higher than had been expected,'' the minutes said.

``Recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting,'' the minutes said. ``However, participants also cited some factors that could be expected to restrain inflation,'' including ``moderate'' growth in compensation, ``relatively wide profit margins'' and additional productivity gains.

In addition, the dollar's recent drop ``was another factor that could add to inflation pressures, although the effect of prior changes in the foreign exchange value of the dollar on core consumer prices had apparently been limited,'' the minutes said.

Moskow, who isn't a voting FOMC member this year, said in the interview on CNBC yesterday that ``it's a situation that we have to monitor very carefully.''

Lacker's Stance

Richmond Fed President Jeffrey Lacker, a voting FOMC member, told reporters May 18 that rising inflation makes a pause in the series of interest-rate increases ``less likely.''

``The inflation outlook is at the borderline of acceptable and perhaps moving beyond,'' Lacker said. ``In circumstances like that, containing inflation has to be the primary focus.''

Other officials have said they will wait for more economic data before reaching a conclusion on what the Fed should do at the next meeting.

``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.''