Federal Reserve officials engaged in a detailed debate about inflation while keeping the door open for a September announcement on the timing of balance-sheet reductions, according to minutes from their policy meeting in July.
The minutes showed a majority of Federal Open Market Committee participants sticking with a forecast that inflation would gradually rise to their 2% target over the medium term. However, “many” saw some “likelihood that inflation might remain below 2% for longer than they currently expected,” according to minutes from the July 25-26 Federal Open Market Committee meeting released in Washington on Wednesday. “Several indicated that the risks to the inflation outlook could be tilted to the downside,” the minutes said.
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There was also a group of “some other” participants who cautioned that easy financial conditions and tight labor markets could result in an “overshooting” of the inflation target that could be costly to reverse. They “cautioned” against “a delay in gradually removing policy accommodation.”
The minutes didn’t specify when the Fed would begin shrinking its balance sheet this year. “Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting,” the minutes said. The Fed next meets on Sept. 19-20.
A higher inflation rate could lead to higher interest rates, and a gradual increase in interest rates could help yield-starved issuers of long-term care insurance, long-term disability insurance, and life and annuity products that offer purchasers long-term rate or benefits guarantees.
The Fed’s portfolio stands at $4.5 trillion in total assets, the legacy of three rounds of quantitative easing as the central bank added additional stimulus with direct bond purchases once its benchmark lending rate was cut to zero in December 2008.
The Fed staff pushed up its assessment of financial stability risks to “elevated” from “notable,” the minutes said. Fed officials discussed stock valuations with “a couple” saying they were supported by “favorable macroeconomic factors.”
U.S. central bankers in June forecast they would raise the benchmark lending rate a third time this year to a range of 1.25% to 1.5%. That step may depend on officials’ evolving forecast for inflation to rise back to their 2% target.