Federal Reserve inflation rift remains but rate rise is still on the cards, minutes reveal

Jasper Jolly
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Fed Chair Janet Yellen Holds News Conference On Interest Rate Decision
Fed economists have been left scratching their heads over persistently low inflation (Source: Getty)

A rift among the Federal Reserve’s top policymakers widened at its last meeting as they weighed persistent weakness in inflation but nevertheless remained on course to raise interest rates later this year, according to minutes published this evening.

The Fed’s economists, led by chair Janet Yellen, have been puzzled in recent months by the lack of uplift in inflation, with the US central bank’s preferred measure showing annual growth of only 1.4 per cent in the year to August, according to the Bureau of Economic Analysis.

That has led to a split between members of the rate-setting Federal Open Market Committee who believe the Fed should plough on with rate increases in order to pre-empt later inflation rises and those who urge caution in cutting rates too quickly.

Read more: Janet Yellen: Federal Reserve may have 'misjudged' inflation dynamics

The latter noted that “some patience in removing policy” was necessary, at the meeting on 19 and 20 September in Washington, according to the minutes.

The minutes said: “Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent”.

However, others “cautioned that an unduly slow pace in removing policy accommodation could result in an overshoot” of the two per cent inflation target, causing the economy to overheat and bringing risks to financial stability.

Nevertheless, despite the disagreement over the inflation predicament, the minutes showed that “many participants thought that another increase in the target range later this year was likely to be warranted”.

That would remain the case “if the medium-term outlook remained broadly unchanged”, the minutes said. A rate rise this year would be “consistent with the expectation that a gradual rise in the federal funds rate would be appropriate”, the minutes added.

Read more: Why the Fed's 'quantitative tightening' will be held back

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