CNNmoney.com
July 1, 2004

WASHINGTON (Reuters) - Fed policy-makers spent much of their May meeting discussing how to best word their post-meeting statement, minutes released Thursday showed.

At issue was whether to use the word "measured" in describing how quickly the central bank planned to raise interest rates as the U.S. economy rebounded.

One group on the Federal Reserve's policy-making Federal Open Market Committee worried the language could hinder the bank's ability to act to forestall inflation.

But others felt it accurately reflected current economic conditions, which "made it likely that the process of returning policy to a more neutral setting would be more gradual, once under way," the minutes showed.

In the end, at the May meeting the panel left short-term rates unchanged but said it thought it could change rates "at a pace that is likely to be measured." Financial markets took comfort, interpreting the language as meaning the Fed was in no hurry to raise rates dramatically soon.

On Wednesday, at their most recent meeting, the Fed hiked the inter-bank lending rate by a quarter-percentage point -- its first increase in four years -- but retained the "measured" language to reassure jittery markets.

According to the May minutes, the panel "discussed at length the advantages and disadvantages" of its previous wording that it could be "patient" in adjusting rates and agreed, with debate, to change it to include "measured."

"A number of policymakers were concerned that such an assertion could unduly constrain future adjustments to the stance of policy should the evidence emerging in coming months suggest that an appreciable firming would be appropriate," the minutes said.

Others on the panel thought the wording was justified, though, and finally the minutes noted, "some policymakers observed that the timing and magnitude of future policy adjustments would ultimately be determined by the Committee's interpretation of the incoming data on the economy and prices rather than by its current expectation of those developments."

In leaving rates unchanged in May, the panel believed "a continuation of its existing policy stance as providing a degree of support to the economic expansion that was still appropriate," the minutes said.

In general, the panel felt the outlook for employment and output growth had "improved distinctly" since the previous meeting in March and the recovery was more firmly entrenched.

Still, the FOMC saw some cause for concern over foreign trade and the long-term U.S. budget gap.

"Some members saw a risk that growth in certain rapidly expanding regions abroad could slow, perhaps sharply, with potentially significant effects on the demand for U.S. exports as well as on global commodity prices," the minutes said in a possible reference to China, where the government has taken stiff measures in recent months to keep its economy from overheating.

The minutes also said "an apparent breakdown in fiscal discipline was seen as an ongoing concern" with the U.S. budget over the long-term.

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