By Evan Ryser

(MNI) WASHINGTON - Federal Reserve officials believe the fight against
inflation is going to take longer than previously expected based on a
resurgence of price pressures at the start of the year, minutes from the Fed's
May meeting showed Wednesday.

"Participants noted disappointing readings on inflation over the first
quarter and indicators pointing to strong economic momentum, and assessed that
it would take longer than previously anticipated for them to gain greater
confidence that inflation was moving sustainably toward 2%," the minutes said.

Some officials also appeared willing to contemplate interest rate
increases if conditions appear to worsen.

"Various participants mentioned a willingness to tighten policy further
should risks to inflation materialize in a way that such an action became
appropriate," the report said. The March meeting minutes made no mention of
policy tightening.

The Fed also removed language from the March minutes saying rates were
likely at their peak.

At the May meeting, the FOMC announced it was slowing the pace of balance
sheet runoff, lowering the cap on Treasuries allowed to roll off as they mature
to USD25 billion per month from USD60 billion, an action the minutes said was
supported by "almost all" participants.

"A few participants indicated that they could have supported a
continuation of the current pace of balance sheet runoff at this time or a
slightly higher redemption cap on Treasury securities than was decided upon,"
the minutes said.

TRIMMING CUT EXPECTATIONS

Expectations for Fed cuts have been curbed sharply in recent months. At
the start of the year, investors envisioned as many as seven rate cuts this
year. Now, market pricing points to one or two cuts and there are widespread
doubts that even those could materialize.

The April CPI report, which showed a 0.3% gain for the month, was seen as
a sign of renewed cooling, although Fed Governor Chris Waller said Tuesday he
gives the data a C+.

Policymakers have moved away from making specific forecasts for when they
will cut rates, emphasizing the need for patience and additional data.

Fed officials are taking some comfort in signs that the economy is
gradually cooling from its red hot pace in the second half of last year, and
remain hopeful that disinflation will soon resume.

The economy created 175,000 last month, a still robust reading but the
weakest in six months, while the unemployment rate rose to 3.9%.

But their confidence in the disinflationary process has clearly been
shaken, pushing the timeline for any possible rate cuts further into the
future.

"Members agreed that they did not expect that it would be appropriate to
reduce the target range until they have gained greater confidence that
inflation is moving sustainably toward 2%."

-- MNI Washington Bureau | +1 202-371-2121 | evan.ryser@marketnews.com

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