Federal Reserve officials said at their latest meeting that they would likely raise short-term interest rates "in the near term" due to a strengthening economy, although several said their support for the move would hinge on whether they see inflation picking up.
Minutes of the Oct. 31 - Nov. 1 meeting, released Wednesday with the usual three-week lag, indicated that officials thought inflation, which has been persistently weak in recent months, could stay below their 2% annual target for longer than many expected.
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Most participants continued to think that a tightening labor market would likely push up inflation over the medium term. Nonetheless as they have in other recent meetings, officials discussed possible explanations for the low inflation numbers at their most recent gathering.
The Fed's working hypothesis in recent months held that low inflation readings were a temporary phenomenon that would fade over time.
At their gathering three weeks ago, "many participants observed, however, that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent," the minutes said.
Those factors included a weakening of the link between the labor market and inflation and the possibility that the labor market could strengthen further.
The Fed's preferred measure of inflation rose 1.6% in September from a year ago, well below the Fed's 2% annual target. Core inflation, which strips out volatile food and energy prices, remained weak at a 1.3% annual rate for the second straight month.
For much of this year, Ms. Yellen and other Fed officials said the shortfall in inflation could be caused by transitory factors, like a drop in pricing for wireless phone plans and subdued growth in health-care prices. But in the weeks since their last meeting, some have questioned how transitory the price weakness may be.
"My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely," Ms. Yellen said Tuesday at New York University's Stern School of Business.
There is also "some hint" that after many years of low inflation, inflation expectations may be drifting down and "that would be a very undesirable state of affairs," she said.
Her views were echoed in the latest minutes. Several participants expressed concern that persistently weak inflation "could lead to a decline in longer-term inflation expectations or may have done so already."
Some officials have said they see little risk from holding off on another rate increase until inflation picks up again.
Chicago Fed President Charles Evans said last week he has an open mind about whether to vote for another move in December, expressing concern that persistently weak inflation may be a more enduring force than central bankers now recognize. Mr. Evans is a voter on the Fed's policy committee this year.
"I will be looking for signs that inflation is going to pick up, that inflation expectations have been increasing," he said in London, adding his decision next month will depend on these and other economic data.
Others, however, are supportive of an increase in short-term interest rates at the next policy meeting, Dec. 12-13. The Fed last raised rates in June to a range of between 1% and 1.25%. At their Sept. 19-20 policy meeting, they penciled in one more quarter-percentage-point rate rise in 2017.
San Francisco Fed President John Williams said last week the "possibility of one late this year, and maybe three next year, seems like a good starting point" for getting rates back to a more normal level, with "normal" being a benchmark federal-funds rate of about 2.5%.
Officials in early October began the process of shrinking the Fed's $4.5 trillion portfolio by letting predetermined amounts of maturing assets run off the Fed's balance sheet. The move had been anticipated for months and caused no major market reaction.
The minutes showed officials were comfortable with the way the drawdown was progressing, saying that the balance sheet wasn't expected to play an active role in monetary policy "in the years ahead."
Reflecting earlier statements that the gradual runoff of assets on the balance sheet would run in the background, officials "generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements might not need to mention the program," the minutes said.
(END) Dow Jones Newswires
November 22, 2017 14:15 ET (19:15 GMT)