AFP – US central bankers remain divided over inflation risks, and some argue they can afford to "be patient" before raising rates again, according to the minutes of the last policy meeting released on Wednesday.
The Federal Reserve had been expected to raise the benchmark lending rate a third time this year, but the minutes of the July 25-26 meeting showed that policymakers remained befuddled by weak inflation, despite historically low unemployment.
The minutes indicated that the Fed could announce "relatively soon" the start of efforts to reduce the central bank’s multi-trillion-dollar investment holdings.
They also showed the Fed that some members increasingly believed an era of inflation was settling in for the long haul, leaving policymakers increasingly torn in different directions.
Amid steady job creation and the falling jobless rate, the Fed has dismissed weak price pressure, blaming them on one-off "transitory" and "idiosyncratic" factors such as falling mobile phone plan and medication prices.
But, after raising rates twice this year, with a third increase expected before the end of 2017, policymakers have found themselves hard pressed to explain the absence of inflation. Over the second quarter, inflation measures have remained weak or even retreated.
On one hand, some meeting participants feared that persistently low interest rates could create financial instability and spur risk-taking. Others believed the low inflation justified allowing the economy to run hotter before hiking again.
As a group, Fed members generally believe inflation will remain low through the second half of 2017, with many believing it will stabilize "over the next couple of years from its current low", according to the minutes.
"Many participants, however, saw some likelihood that inflation might remain below two percent for longer than they currently expected, and several indicated that risks to the inflation outlook could be tilted to the downside," the minutes said.
The dollar nosedives
Those pointing to low inflation said the Central Bank should "be patient" before adopting its next rate hike "until incoming information confirmed that the recent low readings on inflation were not likely to persist."
Fed members were again concerned by the dizzying heights to which Wall Street has risen since President Trump prevailed in November’s presidential elections, suggesting too much easy money had encouraged market speculators.
"The staff warning about asset prices is hawkish, but the doves carried the day in July," Chris Low of FTN Financial said in a client note.
The minutes also suggested that as soon as its next meeting in September the Central Bank could announce the start of a process of drawing down its $4.5 trillion asset holdings, ending a stimulus policy put in place after the 2008 financial crisis.
Since then, the Fed has used the returns on investments in government bonds to purchase yet more bonds, but policymakers decided earlier this year that the time was ripe for the policy to come to an end.
Fed members generally agreed that, given their belief the US economy would likely continue its economic recovery, "it was appropriate to signal that implementation of the program likely would begin relatively soon."
The minutes’ release coincided with Wednesday’s collapse of White House business advisory councils, which were scrapped by President Trump in the wake of several high-profile resignations following his comments on a white supremacist rally in Virginia that turned violent.
The two events sent the US dollar tumbling on exchange markets, with the Dollar Index losing 0.3 percent over the prior day’s close shortly after 1900 GMT.
"The Fed’s growing concern about low inflation suggests officials would proceed cautiously in raising borrowing rates in the months ahead which could potentially scupper plans to hike again before year-end," Joe Manimbo of Western Union Business Solutions said in a research note.