Fed Divided on Inflation Risk

US central bankers are divided over the risk of inflation and disagree over the timing of interest rate hikes into next year, minutes of the last Federal Reserve meeting showed late Wednesday.

Monetary policymakers were likewise split on the timeframe for winding down the Fed’s multi-trillion-dollar investment holdings, with some arguing the central bank should announce this within “a couple of months,” the minutes showed, AFP reported.

Some members of the Federal Open Market Committee, which sets the benchmark US interest rate, also expressed concern that Wall Street stocks were overvalued and that years of loose monetary policy could create risks for financial stability.

The minutes recorded policymakers’ deliberations at last month’s meeting, when the central bank voted eight-to-one to raise interest rates by a quarter of a point to a range of one-to-1.25%—a vote of confidence that the current economic expansion will continue.

Though the move had been signaled well in advance, the increase still puzzled some economists given the absence of mounting inflation in the world’s largest economy.

Closely watched gauges of price pressures have retreated in recent months despite record low unemployment, with job creation remaining robust but showing some signs of slowing. The minutes released showed such concerns extended to the FOMC itself. Most committee members felt the recent weak inflation was likely transitory—attributed to one-off decreases in the costs of mobile telephone plans and prescription drugs.

But “several participants expressed concern that progress toward the committee’s 2% longer-run inflation objective might have slowed.” The committee’s projections call for steady interest rate increases through 2018 but some members at the meeting “were less comfortable with the degree of additional policy tightening through the end of next year” that the Fed’s June forecasts implied, the minutes showed.

Some committee members were also concerned that investors had not reacted to the central bank’s last three rate increases, with financial conditions remaining easy despite the rising cost of borrowing.

They said “equity prices were high,” meaning Wall Street was running too hot, when judged against standard measures for valuing companies. This could argue against maintaining low interest rates, which could favor “a buildup of risks to financial stability,” the minutes said.

Wall Street has rallied repeatedly following the November election of President Donald Trump, with investors buoyed by hopes of tax cuts and slashed regulation—though such prospects have dimmed with major parts of Trump’s agenda mired in Congress.

Policymakers were also divided on when to unwind the Fed’s $4.5 trillion investment holdings of government debt accumulated in the wake of the 2008 global financial crisis.