Fed minutes suggest increasing tensions on inflation shortfall

Mike Powell  Getty Images

But other members of the policymaking Federal Open Market Committee advocated for waiting until later this year to start slowly scaling back the Fed's $4.5-trillion balance sheet to allow more time to assess the state of the economy, the minutes of the June 13-14 meeting said.

"This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, was described in an addendum to the Committee's Policy Normalization Principles and Plans to be released after this meeting". Meanwhile, U.S. officials will soon confront the challenge of raising the debt ceiling to continue to fund the government.

The Fed voted in June to raise short-term rates by a quarter point to a range of 1 to 1.25 percent, the third quarter in a row the bank has lifted rates. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations had changed little on balance.

"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 slow start to the year has led some economists to caution against additional interest rate hikes this year. The rate-setting committee is next scheduled to meet to decide interest rate policy on July 25-26.

Investors also see the next rate increase occurring in December, according to Fed funds futures data compiled by the CME Group.

Some members of the Federal Open Market Committee, which sets the benchmark USA interest rate, also expressed concern that Wall Street stocks were overvalued.

Fed officials lowered their long-term projections for both inflation and the unemployment rate, while their projected path for interest rate increases remained mostly unchanged.

Financial analysts say the Fed's decision to begin reducing its holdings of Treasurys and other assets later this year could begin to curtail the boom in equities. The reductions would begin this year "provided that the economy evolves broadly" as Fed officials are forecasting, she said.

Yellen said last month that asset valuations look "somewhat rich" using traditional metrics like price-earnings ratios.

The details of the meeting, at which the USA 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 Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

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