FOMC to Consider Reinvestment End at 'Upcoming Mtg;' Infl Debate>

--Several Officials Prepared to Announce Start Date in July, Minutes Say 

--Some Voters Want Evidence Soft Infl Transitory Before Next Hike 

--Financial Conditions Factor in Debate Over Mon Pol, Bal Sheet Cuts

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve officials at their July policy 

meeting were split over how to respond to low inflation numbers in a 

time when unemployment continued to fall, though the policymakers agreed 

they were close to announcing the phase-out of balance sheet 

reinvestment, minutes of the meeting released Wednesday showed. 

     The continued easing of financial conditions as equity prices added 

to their gains and long-term rates stayed low was another topic of 

discussion, with one official arguing it warrants a tighter monetary 

policy than otherwise warranted and another viewing the development as a 

general adjustment to lower long-term neutral rates. 

     Several officials were prepared to announce a start date for 

reducing the Fed's balance sheet in July, the minutes said, though "most 

preferred to defer that decision until an upcoming meeting while 

accumulating additional information on the economic outlook and 

developments potentially affecting financial markets." 

     They noted the program was expected to contribute "only 

modestly to the reduction in policy accommodation" and would likely 

cause only a limited reaction in financial markets. 

     "Absent significant adverse developments in the economy or in 

financial markets," the Federal Open Market Committee should signal that 

implementation of the gradual cuts in reinvestment would begin 

"relatively soon," the minutes said. 

     The account also revealed a vigorous internal debate over the 

recent string of inflation readings that went to the core of the 

economic framework on which Fed forecasts are based. 

     Some officials noted they were increasingly uncertain regarding 

their outlook on inflation. They noted the FOMC "could afford to be 

patient under current circumstances in deciding when to increase the 

federal funds rate further and argued against additional adjustments 

until incoming information confirmed that the recent low readings on 

inflation were not likely to persist and that inflation was more clearly 

on a path toward the Committees symmetric 2 percent objective over the

medium term."  

     Though "most participants indicated that they expected inflation to 

pick up over the next couple of years from its current low level and to 

stabilize around the Committees 2% objective over the medium 

term," many acknowledged there was a risk that inflation could remain 

below 2% "for longer than they currently expected." 

     Fed staff economists ahead of the meeting revised down slightly 

their forecast for inflation for 2017 after weaker-than-expected data so 

far this year, though they continued to view the recent weakness as 

transitory. 

     Some voting members "stressed the importance of underscoring the 

Committees commitment to its inflation objective," the minutes said. 

"These members emphasized that, in considering the timing of further 

adjustments in the federal funds rate, they would be evaluating incoming 

information to assess the likelihood that recent low readings on 

inflation were transitory and that inflation was again on a trajectory 

consistent with achieving the Committees 2 percent objective over the 

medium term."

     The officials appeared increasingly puzzled by the trend of soft 

inflation in the face of full employment. A few policymakers went as far 

as citing evidence suggesting the Fed's theoretical framework -- which 

says pressures on prices and wages would rise as demand for goods, 

services and labor resources increased above sustainable levels -- was 

"not particularly useful" in forecasting inflation. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

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