By Lindsay Dunsmuir and Howard Schneider
WASHINGTON (Reuters) - Federal Reserve policymakers had a prolonged debate about the prospects of a pickup in inflation and slowing the path of future interest rate rises if it did not, according to the minutes of the U.S. central bank's last policy meeting on Sept. 19-20 released on Wednesday.
The readout of the meeting, at which the Fed announced it would begin this month to reduce its large bond portfolio mostly amassed following the financial crisis and unanimously voted to hold rates steady, also showed that officials remained mostly sanguine about the economic impact of recent hurricanes.
"Many participants expressed concern that the low inflation readings this year might reflect... the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted," the Fed said in the minutes.
As such several said that they would focus on incoming inflation data over the next few months when deciding on future interest rate moves.
Nevertheless, many policymakers still felt that another rate increase this year "was likely to be warranted," the Fed said.
U.S. stocks and yields on U.S. Treasuries were little changed following the release of the minutes.
Fed Chair Janet Yellen has repeatedly acknowledged since the meeting that there is rising uncertainty on the path of inflation, which has been retreating from the Fed's 2 percent target rate over the past few months.
However, Yellen and a number of other key policymakers have made plain they expect to continue to gradually raise interest rates given the strength of the overall economy and continued tightening of the labor market.
"The majority of Fed officials are worried that core inflation might not rebound quickly, but that isn't going to stop them from continuing to normalize interest rates, particularly not when the unemployment rate is getting so low," said Paul Ashworth, an economist at Capital Economics.
STAYING THE COURSE
The call to not lose faith in gradual rate rises was echoed on Wednesday by two Fed policymakers.
Kansas City Fed President Esther George urged her colleagues to be less fixated on the 2 percent inflation target and argued further rate hikes are necessary to ward off unwanted inflationary pressures.
"Low inflation, in itself, is not a problem in an economy that is growing and operating at full employment," George said.
Likewise, the San Francisco Fed's John Williams said that low unemployment also made him believe inflation was likely to move back to the Fed's target.
In the minutes, several Fed officials noted that the interpretation of inflation readings over the next few months would likely be complicated by a temporary increase in energy costs and prices of other items affected by storm-related disruptions.
The central bank has increased interest rates four times in its tightening cycle which began in late 2015. The Fed currently predicts one more rate rise this year and three the next.
Fed officials have also largely shrugged off a weak jobs report for September that came out last week, pinning the decline in employment on Hurricanes Harvey and Irma temporarily displacing workers.
Policymakers anticipated a weak reading, according to the minutes, but felt the recent storms would not knock the economy over the medium term.
Underlying detail in the monthly payrolls snapshot pointed to tight labor markets boosting wages. Annual wage growth accelerated to 2.9 percent while the unemployment rate fell to a more than 16-1/2-year low of 4.2 percent.
The annual increase in wages in September was the largest since December 2016 and the unemployment rate is now below the Fed's median average forecast for the fourth quarter.
That could give heart to policymakers who had mainly forecast that the tight labor market would soon boost wages.
"Most participants expected wage increases to pick up over time as the labor market strengthened further," the minutes read, "A couple... cautioned that a broader acceleration in wages may already have begun."
The Fed has two more scheduled interest-rate-setting meetings before the end of the year. It next meets on Oct. 31-Nov. 1. Investors currently see the Fed raising interest rates again in December.
Graphic: FOMC Meeting interactive - http://tmsnrt.rs/1RzUE7v