US Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed’s last policy meeting on June 13 and 14 released on Wednesday.
The details of the meeting, at which the US central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed’s large portfolio of US Treasury bonds and mortgage-backed securities by the end of next month, but others wanted to wait until later in the year.
“Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors... however, several participants expressed concern that progress... might have slowed and that the recent softness in inflation might persist,” the Fed said in the minutes.
The committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated.
Last month’s 8-to-1 vote to lift the benchmark interest rate another quarter percentage point, its second this year, signaled the Fed’s confidence in a growing US economy and the eventual inflationary effects of low unemployment.
In a press conference at the time, Fed Chair Janet Yellen described a recent decline in inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next.
Some policymakers since then, however, have shown increasing worry about the Fed’s struggle to get inflation back to its 2 percent objective.
The Fed’s preferred measure of underlying inflation in May slipped again to 1.4 percent and has run below target for more than five years, the US Department of Commerce reported last Friday.
In the minutes, a few policymakers also said the inflation weakness made them less comfortable with the current implied path of rate hikes.
“These participants expressed concern that such a path of increases... might prove inconsistent with a sustained return of inflation,” according to the minutes.
The issue of when to begin reducing the Fed’s US$4.2 trillion portfolio of US Treasury bonds and mortgage-backed securities, and how it might affect deciding future rate rises also sparked debate.
At last month’s meeting, the Fed gave a clear outline of its plan this year to reduce its portfolio, but gave no precise timing. The shedding of the bonds and other securities, most of which were purchased in the wake of the 2007 to 2009 financial crisis, marks the final chapter in the central bank’s normalization of monetary policy.
Several Fed officials felt the reduction in the balance sheet and associated policy tightening “was one basis for believing that... the target range for the federal funds rate would follow a less steep path than it otherwise would.”
However, others said the shedding of bonds should not figure heavily in deciding monetary policy.
Economists largely expect the Fed to begin shrinking its balance sheet at its September meeting before raising rates again at its final meeting of the year in December.
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