Many Federal Reserve officials think the recent decline in inflation is likely due to "transitory" reasons, with policymakers generally believing that they should stick with their patient stance for now, according to minutes of the Fed's most recent meeting.
The Fed kept its benchmark federal funds rate unchanged at its May 1 meeting, citing a somewhat hazier economic outlook and saying muted inflation pressures give the central bank flexibility as it decides its next move.
But the minutes reflect a split among officials over how concerned they should be about inflation falling below their 2% goal. The Fed's favored inflation gauge, the personal consumption expenditures index excluding food and energy prices, grew 1.6% year over year in March.
Fed Chairman Jerome Powell has attributed much of the recent softness in core inflation to "transient" factors, including a decline in portfolio management service prices tied to the market downturn earlier in the year and a fall in apparel costs due to a change in measuring those prices.
Many Fed officials agree that the dip will likely prove temporary, the minutes show, flagging those two areas as seeing "unusually sharp declines" in the most recent inflation data.
But some policymakers worried that the downside risks to inflation have picked up. Some at the Fed expressed concerns that long-term inflation expectations may have dipped below the Fed's 2% goal or are "at risk of falling below that level," the minutes show.
That likely includes St. Louis Fed President James Bullard, who votes on the Federal Open Market Committee this year and said May 22 that the Fed should consider cutting interest rates to help get inflation back to target. Loosening policy even in a relatively healthy economy "may help maintain the credibility of the FOMC's inflation target," he said in a speech in Hong Kong.
The minutes did not show any discussion of a rate cut, and Fed officials have largely avoided hinting that they could favor one this year. That is despite markets' continued expectations that the Fed will opt for an easing of policy.
Boston Fed President Eric Rosengren, also an FOMC voter this year, said May 21 that he is "not as worried" that inflation may be stuck below 2% and that there is "no clarion call" for a rate change.
New York Fed President John Williams also told reporters May 22 that he does not "see any strong argument today" that the Fed should move rates one way or the other. He also said he expects inflation's downward drift to reverse itself in part and that inflation should move back to 2% "over the next year or two."
Asked whether he might favor a rate cut if inflation ends up disappointing, Williams said that would depend on a wide range of factors, including an analysis of whether the misses are expected to be persistent.
"I don't think we're at that point today, and I don't think we'll be at that point in the very near future," he said. "But data-dependent means that you adjust the path of policy depending on how you're doing relative to your goals."
A few other Fed officials, meanwhile, believe a rate increase may be necessary or that the central bank may need to be "attentive to the possibility that inflation pressures could build quickly" as the labor market continues to tighten, the minutes show. The U.S. unemployment rate was at 3.6% in May.
That camp likely includes Philadelphia Fed President Patrick Harker, who has said he still views one rate hike this year as appropriate. Harker will rotate into a voting spot on the FOMC in 2020.