Fed minutes suggest increasing tensions on inflation shortfall

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The details of the meeting, at which the US central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

IG analyst Joshua Mahony said: "With the big European data out of the way, the focus now shifts to the United States, where the FOMC minutes will bring rate expectations to the forefront of investors' minds".

The committee's projections call for steady interest rate increases through next year, but some members of 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.

"This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, was described in an addendum to the Committee's Policy Normalization Principles and Plans to be released after this meeting". They voted 8-1 to increase the federal funds rate by a quarter-point to a still-low range of 1 per cent to 1.25 per cent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. Fed officials viewed weakness in inflation, as well as slow GDP growth recorded in the first quarter, as "transitory" developments. Meanwhile, U.S. officials will soon confront the challenge of raising the debt ceiling to continue to fund the government.

The minutes said "several participants endorsed a policy approach" where the labor market would undershoot their estimate of full employment "for a sustained period". The increase of 0.25 percentage point raised the rate to between 1% and 1.25%.

On the other side of the Fed's dual mandate, the jobless rate declined to a 16-year low in May of 4.3 percent, beneath most Fed officials' estimate of the maximum use of labor resources.

This could argue against maintaining low interest rates, which could favor "a buildup of risks to financial stability", the minutes said. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds.

As of Wednesday afternoon, markets were projecting a 97 percent chance that the Fed would remain on hold when it meets again in July.

"A few participants also judged that the case for a policy rate increase at this meeting was strengthened by the easing, by some measures, in overall financial conditions", according to the minutes.

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