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 The minutes expressed concern the rising dollar could slow a
needed rebound in inflation. They also highlighted economic turmoil
in Europe and Asia, another factor behind the bank's keeping policy
accommodation in place for the near future.
The minutes of the Sept. 16-17 meeting, released on Wednesday after
the usual three-week lag, revealed concern the financial markets are
slightly out of sync with the Fed, and that dropping the current
policy guidance could send unintended signals.
In response, investors bid up U.S. stocks <.SPX> and bonds
<US10YT=RR>, betting the Fed is in no rush to tighten after years of
monetary stimulus. The U.S. dollar <.DXY>, which has risen in the
last 12 weeks, hit a two-week low.
"The Fed is becoming increasingly focused on the potential impact of
the stronger dollar on the domestic economy at a time when the
global growth momentum is beginning to slow, and the uncertainties
this is adding to the economic outlook," said Millan Mulraine,
deputy head of research and strategy at TD Securities.
 Debate within the Fed heated up over how to adopt a more
"data-dependent" policy guidance.
Several policymakers fretted the current guidance that rates will
not rise for a "considerable time" after October gave the false
impression the stimulus would last a long while. Others worried a
change could trip up financial markets and hurt the economy through
higher borrowing costs.
The change would "likely present communication challenges" and
"caution will be needed to avoid sending unintended signals about
the Committee’s policy outlook," the minutes said.
The extent of the debate suggests the committee could move as soon
as its meeting on Oct. 28-29 to change its description of when it
might begin lifting rates from near zero, where they have been since
late 2008.
DELICATE DANCE
The minutes also showed concern from a "couple" of participants that
the strengthening dollar could hurt the economy and cause
longer-term inflation expectations to move slightly lower.
Since the meeting, Fed officials have increasingly flagged the
dollar's rise as hindering a rebound. While unemployment dropped to
5.9 percent in September, inflation measures have eased and the
International Monetary Fund slashed its global economic growth
forecasts on Tuesday.
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Some officials cited disappointing growth and inflation in the euro
zone, while several said "slower economic growth in China or Japan
or unanticipated events in the Middle East or Ukraine might pose a
similar risk," the minutes show.
In response, investors bet on a later start to tightening.
"The deceleration of inflation from the spring and the rising
strength of the dollar are noteworthy, and may mean the Fed may
raise rates later than expected," said Anthony Valeri, investment
strategist at LPL Financial.
U.S. 2015 short-term interest rate futures rose to contract highs on
Wednesday, suggesting traders saw less than a 50 percent chance of a
rate rise in July next year, according to CME Group's FedWatch.
Both Fed and Wall Street economists expect a rate rise to come
around the middle of next year, but the central bankers expect
tightening to be more aggressive than believed by the private
sector.
The Fed acknowledged the market seems behind in this regard and
suggested it could complicate matters when the time comes to raise
rates.
(Reporting by Michael Flaherty and Jonathan Spicer; Editing by Tim
Ahmann, James Dalgleish, Meredith Mazzilli and Andre Grenon)
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