Federal Reserve officials engaged in a detailed debateabout inflation while keeping the door open for a Septemberannouncement on the timing of balance-sheet reductions, according to minutesfrom their policy meeting in July.

The minutes showed a majority of Federal Open MarketCommittee participants sticking with a forecast that inflationwould gradually rise to their 2% target over the medium term.However, “many” saw some “likelihood that inflation might remainbelow 2% for longer than they currently expected,” according tominutes from the July 25-26 Federal Open Market Committee meetingreleased in Washington on Wednesday. “Several indicated that therisks to the inflation outlook could be tilted to the downside,”the minutes said.

There was also a group of “some other” participants whocautioned that easy financial conditions and tight labor marketscould result in an “overshooting” of the inflation target thatcould be costly to reverse. They “cautioned” against “a delay ingradually removing policy accommodation.”

The minutes didn't specify when the Fed would begin shrinkingits balance sheet this year. “Although several participants wereprepared to announce a starting date for the program at the currentmeeting, most preferred to defer that decision until an upcomingmeeting,” the minutes said. The Fed next meets on Sept. 19-20.

A higher inflation rate could lead to higher interest rates, anda gradual increase in interest rates could help yield-starvedissuers of long-term care insurance, long-term disabilityinsurance, and life and annuity products that offer purchaserslong-term rate or benefits guarantees.

Fed's Portfolio

The Fed's portfolio stands at $4.5 trillion in total assets, thelegacy of three rounds of quantitative easing as the central bankadded additional stimulus with direct bond purchases once itsbenchmark lending rate was cut to zero in December 2008.

The Fed staff pushed up its assessment of financial stabilityrisks to “elevated” from “notable,” the minutes said. Fed officialsdiscussed stock valuations with “a couple” saying they weresupported by “favorable macroeconomic factors.”

U.S. central bankers in June forecast they would raise thebenchmark lending rate a third time this year to a range of 1.25%to 1.5%. That step may depend on officials' evolving forecast forinflation to rise back to their 2% target.

The minutes showed some officials questioning an inflationframework that rested on employment and growth rising abovelong-term sustainable levels.

“A few participants cited evidence suggesting that thisframework was not particularly useful in forecasting inflation,”the minutes said. “Most participants thought that the frameworkremained valid.”

Price Goal

The Fed has missed its price goal for most of the past fiveyears. The consumer price index rose 1.7% for the 12 months endingJuly, while the Fed's preferred measure, which is tied toconsumption, rose 1.4% in June.

In June officials lowered their 2017 inflation forecast, andindicated they didn't expect to hit the 2% target until 2018.

The unemployment rate last month matched a 16-year low of 4.3%,and average hourly earnings rose 2.5% for the year, around theaverage rate during the recovery which began in June 2009.

A broader measure of labor costs which includes benefits, theemployment cost index, has also fallen short of the rates ofincrease seen before the recession.

The economy continues to expand. Non-farm payrolls rose by209,000 jobs last month, and gross domestic product expanded 2.6%in the second quarter.

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