Federal Reserve policymakers anticipate that inflation will balance out around 2% in the medium term, justifying a December rate hike, according to minutes from their September meeting.
"Inflation on a 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term," the minutes read. "With the medium-term outlook little changed, inflation below 2 percent, and the neutral rate of interest estimated to be quite low, all participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate at this meeting, and nearly all supported again indicating in the post-meeting statement that a gradual approach to increasing the federal funds rate will likely be warranted."
Minutes of the July Federal Open Market Committee meeting showed some members of the policy group believed that inflation might not hit 2% for longer than expected, casting doubt on whether the Fed would hike interest rates again in December.
Fed Chair Janet Yellen had previously said one-off events, like price drops in cell phone subscriptions, were to blame for the low inflation. A low August PCE inflation report followed public appearances in which Yellen seemed committed to raising rates once more in 2017, but September's nonfarm payroll report showed an uptick in average hourly earnings and a lower unemployment report, despite the economy losing 33,000 jobs due to recent hurricanes.
With inflation running consistently below the Fed's target, some members suggested that new forces are at work. "Some participants discussed the possibility that secular trends, such as the influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying," the minutes note.
The minutes also state members agreed to start unwinding its $4.5 trillion balance sheet in October, anticipating any market reaction "would likely be limited," because of the committee's planned, gradual approach.