When Federal Reserve officials announced after a May 18 policymaking session that they were leaning toward raising short-term interest rates, many investors and analysts assumed the Fed was preparing financial markets and the public for a boost in rates.

The assumption turned out to be correct. The policymaking group decided this week to raise the Fed's target for overnight rates to 5 percent from 4.75 percent in an effort to make sure inflation stays low.

But according to minutes of the May meeting released yesterday, a number of the officials thought at the time that "there were reasons to believe that economic growth could well slow without any adjustment to policy." Those officials emphasized that the decision to lean toward higher rates "should not be viewed as necessarily implying a near-term policy change or indeed any change over time unless circumstances warranted," the minutes said.

An expectation that economic growth would slow from the 4 percent rate of the past several years, particularly with long-term rates up sharply in recent weeks and short-term rates now a quarter-point higher, could explain why the policymakers decided this week not to continue to lean toward higher rates.

The move back to a neutral stance regarding future policy actions surprised many investors who had expected a signal from the Fed that other rate increases might be on the way, perhaps as soon as the next meeting on Aug. 24. The announcement Wednesday that the group had moved back to neutral sparked large stock and bond market rallies -- though the latter slumped yesterday following a report that conditions in the manufacturing portion of the economy strengthened last month.

The May minutes leave the precise meaning of a neutral stance, or a lean one way or the other, unclear to many analysts. In fact, there is significant disagreement among some of the officials themselves about that meaning.

For instance, the policy directive adopted in May said the group "believes that prospective developments are more likely to warrant an increase than a decrease in the federal funds rate [target] during the intermeeting period." But some officials have said in interviews that a neutral stance or an "asymmetric" one -- that is, a lean toward raising or lowering rates -- has implications for the policy decision at the subsequent meeting, not just for the period until that meeting.

Another reason for the difficulty in interpreting the Fed's stance is that the May statement marked the first time policymakers had announced a shift in their stance immediately after their decision. Previously, they did not disclose their stance until after the following meeting, six to eight weeks later.

According to the May meeting minutes, the officials wanted to lean toward higher rates because "their concerns about the outlook for inflation had increased significantly since the previous meeting." But rates were not raised then, because "signs of an actual change in inflation were still quite tentative and anecdotal, and they did not warrant an adjustment to policy at this meeting."

Nevertheless, the officials wanted the public to know about that concern so that markets could be prepared for a later move on rates. As the minutes explained, the group "had said that it would not necessarily publish every change in the symmetry of its directive, but this shift to asymmetry represented a significant change in the [group's] assessment of the risks of higher inflation, and its announcement would alert the financial markets and the public more generally to this development.

"That, in turn, should encourage stabilizing reactions in financial markets and perhaps reduce the odds of an outsized response if evolving circumstances in the near term were to require an adjustment to policy that had not previously been anticipated," the minutes continued.

Well, financial markets were alerted by the May announcement, and in the opinion of some analysts, the markets didn't just prepare for the possibility of only one rate increase but rather the possibility that several were on the way. Some longer-term rates rose so much that some private corporate borrowers have postponed or reduced planned new note and bond issues.

Some of the analysts suggested that the run-up of longer-term rates could be one reason Fed officials moved back to a neutral stance after raising rates this week.

"Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the [policymaking group] has chosen to adopt a directive which includes no predilection about near-term policy action," the Fed said Wednesday in announcing the rate increase.

The group, "nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth," it added.

In other words, even with a neutral directive, rates could be raised again, even as early as Aug. 24.

CAPTION: Rasing the Rate (This graphic was not available)