WASHINGTON — With the economic outlook little changed in the run-up to its Nov. 1 gathering, many Federal Reserve officials deemed another imminent increase in their benchmark short-term interest rate to be appropriate even as worries over a longer lasting shortfall in inflation deepened, minutes of the meeting showed Wednesday.
That should support overwhelming market expectations that the Fed will raise its key policy rate to a target range of 1.25% to 1.50% at the conclusion of its next meeting on Dec. 13.
Several voting members "were reasonably confident that the economy and inflation would evolve in coming months such that an additional firming would likely be appropriate in the near term," the minutes said.
Among all of the Federal Open Market Committee, "many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged."
Still, policymakers appeared to be increasingly uncertain why inflation has not perked up even as the labor market tightened and the unemployment rate dropped to 4.1%. The Fed's preferred measure of inflation, the core personal consumption expenditures price index, fell sharply from a 1.9% annual pace earlier this year to just 1.3% in September.
"With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected," the minutes said.
One possibility for the low readings was cited as "the influence of developments that could prove more persistent," including a decline in longer term inflation expectations or secular factors such as technological innovation disrupting existing business models. But those theories proved controversial among the FOMC members.
While several participants, which include nonvoters, expressed concern that weak inflation could lead to a decline in longer term inflation expectations "or may have done so already," others noted the measure had remained stable this year.
The Fed kept its policy rate steady at a target range of 1.00% to 1.25% at the November meeting as expected. The minutes showed that all officials thought it was appropriate to hold rates steady and "nearly all" supported saying in their post-meeting statement that "a gradual approach to increasing the federal funds rate will likely be warranted."
Officials cited the tight labor market as supporting inflation over the medium term. Payroll growth remained "well above the pace likely to be sustainable in the longer run" and was likely to ripple across wages. A few officials said they saw recent data as indicating some firming in wage growth while a few others saw wages as little changed over the past year.
Judging the economy more broadly, Fed officials again noted that the expansion was evolving mostly as expected and even the unusually destructive hurricane season won't have any material impact over the medium term.
Officials "anticipated appreciable increases in business fixed investment" on account of improved demand from abroad, rising profits and the substitution of capital for labor as competition for the latter heats up.
A few officials noted the prospects for significant tax cuts under the Republican proposal "had risen recently," saying "the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions was enacted."
Financial conditions remained accommodative, causing several officials to express concerns about a potential buildup of imbalances. However, a low neutral rate of interest partly explained the elevated asset prices, and strengthened regulation has increased the resilience of the financial system to any sharp reversal in asset prices, the minutes noted.
