Federal Reserve officials raised interest rates at the end of June as a hedge against uncertainty.
According to the minutes of a June 29-30 policymaking session released yesterday, the officials agreed that inflation "remained remarkably subdued" and that economic growth was likely to slow to a pace less apt to add to inflationary pressures, especially in the nation's tight labor markets.
But they weren't sure about the slowing, so they voted to tap the economic brakes by raising their target for the federal funds rate--the interest rate financial institutions charge one another on overnight loans--by a quarter of a percentage point. They did so again at a subsequent meeting Tuesday, which boosted the target to 5.25 percent.
The June move "represented a desirable and cautious preemptive step in the direction of reducing what [the officials] saw as a significant risk of rising inflation," the minutes said.
The Federal Open Market Committee members were more sharply divided over what kind of signal to send to the public about their future intentions, particularly since the committee had only recently begun announcing the subtle changes in whether the group was leaning toward moving rates up or down.
When the committee adopted a lean toward higher rates--called an asymmetrical directive--at its May meeting, financial markets immediately concluded that rates would be raised at the June session. They were, but often an official tilt has not been followed by an actual change.
After the committee decided on a rate increase, a majority wanted to adopt a neutral stance--called a symmetrical directive--implying that they were not leaning toward future moves in either direction, because those members thought that announcing a lean toward higher rates would cause investors again to assume rates were sure to go up at this week's meeting. While it wasn't specifically mentioned in the minutes, some Fed officials said they also were concerned that if traders and investors feared a long string of rate hikes, that might trigger a significant downward move in stock prices.
Besides, there was the uncertain outlook to consider.
"In light of the marked degree of uncertainty relating to the extent and timing of prospective inflationary pressures, they believed that [further rate increases] might not be necessary in the near term and in any case would depend importantly on future developments," the majority argued, according to the minutes.
But a minority nevertheless favored keeping an asymmetrical directive in place. That group argued that was "the best way to convey their concerns about the risks of rising inflation and the potential need to [raising rates] over time," the minutes said.
In the end, the minority went along with the majority on the grounds that any misunderstanding could be corrected by the wording of the announcement that was to follow the meeting, as well as through upcoming congressional testimony by Chairman Alan Greenspan, the minutes said.
As it turned out, financial analysts initially had widely divergent views of what June's symmetrical directive meant regarding future Fed actions.
At Tuesday's meeting, the FOMC once more okayed a neutral stance, and again analysts differed over its meaning.
The language implied more strongly than in June that the committee really had no clear presumption about its next move or when it might come. The two rate increases taken together "should markedly diminish the risk of rising inflation going forward," the announcement said.
Some analysts said they thought only some news pointing unmistakably toward higher inflation would prompt another rate increase that the FOMC's next meeting, Oct. 5. At the other end of the spectrum, others said only news pointing clearly to slower economic growth would forestall one.