Federal Reserve officials agreed when they gathered on May 4 that they would probably raise their key interest rate target "sooner than previously expected" after noting that the economic outlook had "improved distinctly," according to minutes of the meeting released yesterday.
However, the policymakers were not certain they would lift the target at their next scheduled meeting in late June, in part because they saw signs of both building economic strength and lingering weakness, the minutes show.
In particular, they were unsure about the likely course of inflation, the minutes indicate. Many members of the Fed's top policymaking committee noted the "surprisingly large" recent jump in inflation, which "had increased their uncertainty" about future price trends. "Still, most members saw low inflation as the most likely outcome," according to the minutes, which are released, after a delay, after each meeting.
The Federal Open Market Committee left its target for its benchmark rate unchanged at 1 percent at the May meeting. It also issued a statement signaling that if it decided at the June meeting to raise the target, it would do so very gradually.
At that June meeting, which concluded Wednesday, the group nudged the target up to 1.25 percent and warned that the pace of future increases would probably be "measured" but could change with economic conditions.
The minutes of the May meeting, although now eight weeks old, offer a snapshot of Fed policy in transition, providing some sense of the discussion within the central bank as officials prepared to lift the target from its lowest level in 46 years. The minutes summarize the exchanges without identifying the individuals expressing certain opinions or supplying the details of a transcript.
The Fed's top policymaking committee had lowered the target for its federal funds rate, the rate charged between banks on overnight loans, to 1 percent in June 2003 in large part to stimulate a weak economy. Although super-low interest rates did persuade consumers and businesses to borrow and spend in the following months, job growth remained feeble through the fall and winter.
But by May's Fed meeting, the latest economic data available showed that hiring had surged in March, marking a potential turning point in the recovery. At the same time, however, the labor market contained several pockets of weakness, such as the relatively low 65.9 percent of the adult population participating in the labor force, which consists of people who have jobs or are actively seeking them.
"Overall, committee members were now more convinced that robust growth would be sustained," the minutes report.
Yet, "a number of the policymakers commented that some of the considerable caution that had earlier marked business attitudes apparently lingered," the minutes show. "The pace of hiring seemed to be picking up only gradually" and business investment remained "moderate."
The minutes indicate that the members were troubled by recent price increases but unsure whether they reflected temporary or continuing inflationary pressures.
"Some members saw underlying inflation as relatively stable and put low odds on the possibility that prices now were accelerating. . . . Others, however, were less confident about the degree of restraint on prices."
Either way, the group concluded it "would need to initiate a process of [raising the rate target] at some point, and the recent experience suggested that the time at which policy firming appropriately would commence might be closer than previously had seemed most probable."