Inflation remains a worry for some Fed officials, and might require further rate hikes.
Or, the Fed is nearly done with their tightening cycle.
Those are the themes in a pair of separate WSJ articles today. It should come as no surprise then, that the investor reaction to the Fed minutes might have been somewhat confused.
Greg Ip, the Journal’s Fed watcher, wrote:
"Although officials suggested that rates are "close to where [they] needed to be," some increases "might be needed" to contain the risk of higher inflation. Some officials went further, arguing that the case for higher rates was reinforced by current "readings on core inflation and inflation expectations that were somewhat higher than was desirable over the long run." (emphasis added)
Inflation has fluctuated between 1.9% and 2.3% for the past year and a half, based on the Fed’s preferred price index."
The other side of the case was presented by Credit Markets reporter Michael Derby, who noted:
"The release of a Federal Reserve document that suggested to some bond investors that rate increases are nearing their end failed to have much impact on U.S. Treasury prices yesterday and left the market in the same modestly negative spot it was in ahead of the release.
According to the minutes from the Jan. 31 Federal Open Market Committee meeting, Fed officials, while worried about upside risks to inflation, said that "the stance of policy seemed close to where it needed to be given the current outlook." But they added, in a familiar refrain, that "some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable."
The FOMC minutes for most in the market confirmed what they already knew: the Fed has a modest amount of rate increases left in it, and how that tightening plays out will be the product of what the economic data do. As such, the lack of surprise stripped from the market any catalyst to trade dramatically. In turn, that left the market very close to the same negative tone that dominated the day." (emphasis added)
So is the Fed almost done, or do they have more work to do? The answer depends upon what page you are reading . . .
Fed Minutes Indicate Inflation Still a Worry for Some Officials
WSJ, February 22, 2006; Page A2
Investors React Coolly To Signals by FOMC
Treasurys Decline Slightly As Fed Indicates Increases In Rates Could End Soon
MICHAEL S. DERBY
WSJ, February 22, 2006; Page C7