At the July Federal Reserve Open Market Committee (FOMC) meeting, interest rates were left unchanged with the Fed Funds range at 1.00-1.25%.
The minutes stated that there was a wide-ranging debate on inflation, asset prices and financial stability. Given the concerns over lower inflation, there was agreement to monitor inflation developments closely.
Most participants expected inflation to pick-up over the next couple of years and stabilise around the 2% target. Other member, however, saw some likelihood that inflation might remain below 2% for longer than expected.
The members concerned over the dip in inflation continued to comment that the Committee could afford to be patient in deciding whether to increase interest rates further.
In contrast, some members were concerned that delays in raising interest rates further could intensify financial stability risks.
Several members noted that there had been an easing of financial conditions, although there were differing assessments of the likely implication. A couple of committee members were concerned that high equity prices could also pose risks to financial stability.
This is the same argument that has played out within the committee throughout the last 18 months.
As far as starting to shrink the balance sheet is concerned, some committee members were prepared to announce a start date at the July meeting, although a majority preferred to defer that decision until an upcoming meeting.
The minutes overall were close to expectations and illustrate that inflation developments over the next few months will be crucial in determining whether the Fed pushed ahead with policy normalisation.
The comments on inflation triggered fresh doubts surrounding further rate increases with futures markets indicating the chances of a further rate hike this year had dipped to below 40% from close to 50% earlier yesterday.
The dollar had dipped significantly lower into the minutes with USD/JPY retreating to the 110.50 area from highs above 110.90 with some fresh concerns surrounding the geo-political situation.
The US currency came under further pressure following the minutes with USD/JPY dipping to the 110.20 area as EUR/USD moved back above 1.1750.
Treasuries rallied further with the 10-year contract up over 10 ticks on the day to yield 2.23%.