By Howard Schneider
WASHINGTON, Oct 7 (Reuters) - Federal Reserve policymakers were divided last month over the rationale for raising interest rates, with "some participants" seeing a hike as needed to keep the impact of energy and other price shocks at bay, but a more hawkish core viewing it as necessary to guard against emerging demand-driven inflation.
The competing arguments were outlined in the minutes of the US central bank's September 15-16 meeting, at which the Fed voted unanimously to raise
the policy rate by a quarter of a percentage point even as officials disagreed about whether the move was largely precautionary or represented a shift towards significantly tighter monetary policy meant to curb investment and spending.
The split, and the varying interpretations of where the economy stands right now, set up a likely vigorous debate at the October 27-28 policy meeting over whether inflation has taken on a broader, demand-driven dimension that warrants further Fed action now. The alternative would be to wait on further rate hikes to see if incoming data shows energy, tariff and other price shocks receding and inflation heading back to the central bank's 2% target.
"Many participants emphasized that a higher path for the target range would be prudent on risk-management grounds, providing insurance against inflation remaining persistently above target due to stronger-than-expected demand or further adverse supply shocks," said the minutes of the session, which were released on Wednesday.
Others, meanwhile, saw the "higher policy rate" approved in September as important to prevent recent energy and other shocks from having a broader influence on prices, while "a couple" framed their support for the hike as matching what they saw as a higher estimated neutral rate of interest.
"Several participants stated that they viewed the current policy rate as not restrictive or only mildly restrictive," the minutes stated. "Most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end."
Investors, who had expected sequential rate hikes in the days following the September meeting, have since pared back their bets and now see the Fed keeping its policy rate in the 3.75%-4.00% range at its meeting later this month, just ahead of midterm congressional elections, but hiking again at the December 8-9 gathering.
Following the release of weaker-than-expected jobs and inflation data, Fed officials' recent comments added weight to the sense that policymakers would now allow some time for new data to show whether underlying inflation was coming down from current levels that are more than a percentage point above the Fed's target, or proving more persistent.
But the arguments outlined at the September meeting have persisted, with some policymakers also saying they feel more and faster rate hikes are needed, potentially setting up a divided outcome and multiple dissents at the meeting later this month.
(Reporting by Howard Schneider; Editing by Paul Simao)
