WASHINGTON—Federal Reserve officials sought to keep their options open at a July policy meeting as they tried to reconcile differences on the economic outlook and when to raise short-term interest rates.
Several wanted to wait until they were more confident inflation would rise to the Fed’s 2% objective, while others believed the U.S. is close to a fully recovered job market and a rate increase would soon be warranted, according to minutes of the Fed’s July 26-27 meeting released Wednesday.
Taken together, the meeting minutes suggested a rate increase is a possibility as early as September, but the Fed won’t commit to a move until a stronger consensus can be reached about the outlook for growth, hiring and inflation.
“Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information,” the minutes said.
The Fed raised its benchmark federal-funds interest rate from near zero in December, and began the year expecting to nudge rates up four more times in quarter-percentage-point increments in 2016. It hasn’t moved because of worries about growth, hiring and turbulence overseas.
Some worries have receded, including whether markets would convulse after Britain’s June decision to leave the European Union.
“Participants generally agreed that the prompt recovery of financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook,” the minutes said.
Most Fed officials expect growth to pick up in the second half of the year, but several still harbor doubt, especially because inflation has run below the Fed’s target for four straight years.
Against that backdrop, the Fed divided into three camps at the July meeting: Those who aren’t ready to move rates up, those who are ready, and those who say the moment is getting closer.
Several officials “preferred to defer another rate 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 said. Others believed the U.S. was “at or close” to full employment, meaning a state where unemployment was low, fully recovered from recession and at a point where if it falls much more it could cause more inflation. These people believed a rate increase “was or would soon be warranted.”
Some Fed officials also worried that a prolonged period of very low rates could cause investors to misallocate investments or misprice risk, possibly leading to a destabilizing financial bubble and bust.
The Fed next meets Sept. 20-21. Since the last meeting, economic data have been mixed and officials have warned investors not to underestimate the likelihood of another rate increase. Jobs data for July were strong—payrolls rose 255,000—but retail sales and inflation indicators for the month were soft, leaving open the possibility of a prolonged Fed divide that could further delay the next rate move.
Write to Jon Hilsenrath at [email protected]