Fed rate-setters divided on pace of rate hikes needed, minutes show

Policy-makers at the US Federal Reserve were divided when they met in July about just how soon policy needed to be tightened next, with some focusing on labour market gauges which were pointing towards so-called 'full-employment' and others preferring to wait given what they said were benign inflation conditions, the minutes of their last rate-setting meeting showed.

The minutes followed close on the heels of remarks from two Fed officials the previous day, the presidents of the Federal Reserve banks of Atlanta and New York, signalling that there was scope for at least one more rate hike in 2016.

William Dudley, the head of the latter, was the more vocal of the two, suggesting that markets were being complacent about how much tightening would be needed over the coming year. Their remarks helped push the odds of a rate hike at the December 2016 meeting up to 50.3% before the minutes were released, according to pricing on Fed funds futures from the CME's Fed Watch tool.

However, yields on longer-dated Treasuries retreated after the minutes of the 26-27 July meeting were published.

That on the benchmark 10-year US Treasury note was down by two basis points at 1.56% as of 20:50 BST after having hit an intra-day high at 1.5866%.

"Several [members] suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis," the minutes stated.

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity".

Commenting on the content of the minutes, Michael Gapen and Rob Martin at Barclays Research said: "If the August employment report, scheduled for release on September 2 (after the Economic Policy Symposium at Jackson Hole), is solid, then we expect the Fed to raise rates at its September meeting.

"That said, the concerns in some corners of the committee about the inflation outlook may support a shift in the reaction function away from observed labor market progress toward actual progress on inflation. Should this policy shift take place, then the next rate increase is likely to be deferred to December, if not further into 2017."