WASHINGTON (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 (Aug 16).
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 policymakers remained befuddled by weak inflation that has persisted despite historically low unemployment.
But members of the Federal Open Market Committee agreed the Fed could announce “relatively soon” the start of planned efforts to reduce the central bank’s multi-trillion-dollar investment holdings, a move that will effectively raise borrowing costs.
Amid steady job creation and the falling jobless rate, many Fed officials continue to dismiss weak price pressures, blaming them on “idiosyncratic” factors, such as falling prices for mobile phone plans and medications.
But after raising the key interest rate twice this year, monetary policymakers have found themselves hard pressed to explain the absence of inflation, as closely-watched measures have remained weak or even retreated from the Fed’s 2 per cent target.
The minutes showed Fed members were increasingly torn in different directions, with some believing the current era of low inflation could last well into the future.
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.” But other participants feared that persistently low interest rates could create instability and spur risk taking in financial markets.
Fed members generally believe inflation will remain low through the second half of this year, with many expecting the rate to stabilize “over the next couple of years from its current low,” according to the minutes.
However, others “saw some likelihood that inflation might remain below two percent for longer than they currently expected,” the minutes said.
The minutes also confirmed expectations that the central bank as soon as its next meeting in September could announce the start of a process of drawing down its $4.5 trillion asset holdings.
The Fed bought huge amounts of bonds to support the financial markets during the 2008 crisis, which had a similar effect as rate cuts, and has been working for months on a plan to gradually reduce investment holdings without roiling markets.
Fed members generally agreed that, given their belief the US economy likely will continue its economic recovery, it was “appropriate to signal” the program “likely would begin relatively soon.”