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The Fed: No More "Measured"?

Another quarter-point hike is likely when Greenspan & Co. meet May 3. Don't be surprised, though, if they drop this familiar description

When Federal Reserve Chairman Alan Greenspan and his central bank colleagues first began talking about "measured" interest rate increases a year ago, they were sure of one thing: They didn't expect a repeat of 1994-95, when the Fed aggressively jacked up rates from 3% to 6%. This time around, with inflation ultralow and productivity superstrong, Greenspan & Co. felt the central bank could take a more gradual approach to a tighter monetary policy.

What that has meant in practice -- and what the financial markets have come to expect -- are bite-size quarter-point increases every time the rate-setting Federal Open Market Committee meets. And the group is almost universally expected to follow that course at its next meeting on May 3, raising the federal funds rate to 3% from 2.75%.

But with inflation rising at a quicker pace lately and productivity growth slowing, Fed insiders are feeling a bit hemmed in by investor expectations of continued quarter-point moves -- and could scrap their declaration of measured rate hikes at their upcoming meeting. Policymakers perceive that the risks are shifting a bit toward faster inflation, and they may prefer to be free of any constraints on moving rates up faster should that prove necessary.

MISSING VOICE.

  The Fed discussed abandoning its assurance of gradual rate hikes at its last meeting on Mar. 22. But in the end, the policymakers decided to stay the course. Since then, though, inflationary pressures appear to have picked up. Excluding volatile food and energy costs, consumer prices jumped 0.4% in March, their biggest one-month gain in more than 2½ years. The Fed's own roundup of economic activity across the nation, the so-called Beige Book, also found that "upward price pressures have strengthened."

The biggest change since since the FOMC's last meeting is that one of the most ardent advocates of retaining the "measured" language, Fed Governor Ben S. Bernanke, won't be in the room. Bernanke, who has been chosen by President Bush to become chairman of the Council of Economic Advisers, has recused himself from Fed monetary policy meetings while he's awaiting Senate confirmation of his nomination.

Even though economic growth has shown signs of slowing since the Fed's last meeting, with consumers in particular pulling back on their spending in response to higher gasoline prices, Fed policymakers so far have generally played down the significance of that slackening, while stressing their vigilance on inflation. "There are emerging signs of inflation," Fed Vice-Chairman Roger W. Ferguson said after a speech in North Carolina on Apr. 20. "We need to track pricing developments quite closely."

NOT A SURE BET.

  Financial markets, too, are looking a lot more skittish now that they did when the Fed last met on Mar. 22. Stock and bond prices have swung widely in recent weeks and could be unsettled further if the Fed backs away from what investors see as its pledge of a go-slow monetary policy. Fed officials, however, don't appear overly concerned about the markets' recent gyrations.

So what's the bottom line? Chances are good that Greenspan & Co. will ditch their declaration of "measured" rate hikes at their next meeting. It's not a sure bet, but it's something that investors should be prepared for.

By Rich Miller

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