Highlights
The FOMC minutes of the May 10, 2006 meeting continued the Fed's internal debate over the timing of ending the current tightening cycle. The Fed's stance now is one of balancing the incoming data to determine whether there are sufficient changes in the outlook for real growth and inflation to warrant another Fed tightening or whether to pause. Emphasis is not just on waiting for new data before the next FOMC meeting on June 28 and 29, but also on focusing on the economic outlook. The Fed policy decisions are clearly focusing not just on the currently robust economic picture but on the degree of moderation that is expected in current months. Curiously, the Fed pointed to somewhat greater strength in the economic outlook and higher-than-expected core inflation, but retained a very mild marginal bias toward tightening rather than adopting more aggressive anti-inflation language.

The Fed clearly noted that the first quarter was very robust, following a weak fourth quarter-with weakness seen correctly as temporary. However, the mix of economic strength and moderation by sectors can mostly been seen as favorable by the Fed. The consumer sector is moderating due to a number of factors. These include higher interest rates, a slowing in housing appreciation, slowing in stock market gains, and higher energy prices. The Fed can only be pleased with the boost in business investment which will help raise capacity and lessen long-term inflation pressures.

On the inflation front, a number of FOMC committee members clearly were concerned about the stronger-than-expected increases in core inflation. The PCE deflator excluding food and energy is now running at a 2.1 percent year-on-year pace and is at the upper limit of what many perceive the Fed to find an acceptable inflation rate. Labor costs were pointed out to be mixed with employment costs moderating according to the ECI while compensation per hour accelerated somewhat. The unemployment rate has resumed a downward trend with shortages of some types of labor occurring. But productivity gains have helped restrain labor costs. Disconcerting to some committee members was an increase by a number of measures in inflation expectations. This increase-along with stronger-than-expected gains in core inflation data-may be the key reason that the balance in Fed thinking about the next policy move is likely to be for another quarter point increase in Fed funds and the discount rate. A key quote is, "However, recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting." Furthermore, committee members noted that even though energy price increases had not yet significantly impacted the core inflation rate, energy prices are higher than earlier and will eventually boost the core PCE deflation somewhat.

Net, the FOMC minutes clearly show the Fed seeing a stronger economy and higher inflation expectations. The May 10 statement probably was a little soft given the commentary of inflation expectations. Today's minutes do not change the economic outlook dramatically, but they do increase the odds of a Fed tightening to come out of the June 28 and 29 meeting.

2006 Release Schedule

Released On: 1/3 2/21 4/18 5/31 7/20 8/29 10/11 11/15 Released For: Dec Jan Mar May Jun Aug Sep Oct