The Wall Street Journal's Jon Hilsenrath unleashed an instantaneous reaction to today's FOMC minutes and the message is clear - markets are much less uncertain than the Fed about the timing (sooner rather than later) of the first rate-hike. The minutes of the meeting, Hilsy notes, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony.
Federal Reserve officials debated at their July meeting whether to move sooner than expected to start raising interest rates in light of an improving job market and rising inflation, but decided they needed more evidence before concluding that was the right approach.
The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices.
Most officials agree they are seeing progress away from high unemployment and very low inflation. Some believe this warrants moving toward tighter credit conditions but many others remain unconvinced.
"Many participants noted that if convergence toward the [Fed's] objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated," said the minutes of the July 29-30 meeting.
"Most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation," the minutes said.
Among their concerns: The economy's first-quarter contraction, though seemingly temporary, caused uncertainty about the outlook, as did turmoil in the Middle East and Ukraine, persistent weakness in the housing sector and slow-growing household incomes.
Short-term U.S. rates have been held near zero since December 2008. Most Fed officials believe they can wait until 2015 before raising rates and have encouraged a perception in markets that rate increases won't start until the middle of the year.
Fed Chairwoman Janet Yellen said in testimony to Congress in July that rate hikes might come sooner than planned if unemployment continues to fall faster than expected and if inflation—which has been below the Fed's 2% target for more than two years—moved rapidly toward the goal. The jobless rate was 6.2% in July, down from 7.3% a year earlier.
The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony. She balanced her discussion of early rate hikes by also noting rate increasess might be delayed if the economy underperforms. At the July policy meeting, however, discussion seemed to focus on the possibility of early increases and not late increases.
"Some participants viewed the actual and expected progress toward the [Fed's] goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the [Fed's] unemployment and inflation objectives over the medium term," said the minutes, which don't identify the participants by name or specify the number who held certain views.
The Fed has been saying for months it expects to keep rates near zero for a "considerable time" after it completes a bond-buying program in October. Officials who want early rate increases are pushing the central bank to drop that guidance.
"The guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate," the minutes said.
Ms. Yellen will deliver remarks at the Kansas City Fed's gathering in Jackson Hole, Wyo., on Friday, a chance for her to update the public on her views about how the job market is progressing.
While officials debate the timing of rate increases, they are making progress on ironing out details of how to raise rates. Minutes showed they agreed they will use two levers—interest they pay banks on reserves and interest they pay others such as money market mutual funds—to keep short-term rates in a gradually rising band once the time for rate increases begins.