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US Federal Reserve split over pace of interest rate hikes

Hannah Boland
The Fed at the meeting last month chose to keep interest rates at a range between 1pc and 1.25pc - © Ian Dagnall / Alamy Stock Photo

America's central bank signalled a possible slowing down in the pace of interest rate rises, as concerns mounted over lagging inflation. 

Minutes from the US Federal Reserve’s meeting at the end of July, published this evening, showed a debate among policymakers over the effect rate hikes would have on inflation.

Some officials had argued the Federal Open Market Committee (FOMC) "could afford to be patient under current circumstances in deciding when to increase the federal funds rate further" and said it should hold off on additional adjustments until "incoming information confirmed that the recent low readings on inflation were not likely to persist".

Inflation has continued to lag the Fed’s target of 2pc, last month having risen by 0.1pc to take the year-on-year consumer price index to 1.7pc, prompting some to question whether the central bank should be raising rates.

The bank has been targetting 2pc inflation since 2012, but since then, inflation has averaged at 1.3pc.

Other policymakers, however, argued that a delay in hiking rates could lead to an inflation overshoot and an "intensification of financial stability risks or to other imbalances that might prove difficult to unwind". 

The Fed at the meeting last month chose to keep interest rates at a range between 1pc and 1.25pc, having lifted them from a range of 0.75pc to 1pc in June and having also raised rates in March. It has previously said it would raise rates three times in 2017. 

Data released yesterday reinforced the view the Fed would deliver on its plans to hike rates again this year, after it was revealed that US retail sales in July rose by the fastest rate since last December. Sales had risen 0.6pc last month, ahead of expectations for a 0.3pc rise.

However, while a September rate hike appears less likely in light of the minutes, the market is still expecting the Fed to begin shrinking its $4.5 trillion (£3.5 trillion) balance sheet next month, through reducing reinvestment of maturing bonds with an initial cap of $10bn a month. ​

Ian Shepherdson, from Pantheon, said that given the "payrolls and retail sales numbers since the meeting, we expect the FOMC to announce the start date at the September meeting".

US employment had jumped by much more than expected in July, surging by 209,000 jobs.