Fed minutes reveal debate over inflation and Trump

The minutes, disclosed overnight, showed Fed officials discussing plans to reduce the Fed's bond holdings later this year and disagreeing over whether it would be safe to let inflation rise faster.

John Williams, president of the San Francisco Federal Reserve Bank, said this process would take several years and run in parallel, albeit for longer, to increases in the Fed's interest rates.

The statement comes at a time when the uncertainty of Trump's ability to follow through on his economic promises is growing. He also repeated his view that a total of three rate increases was his base case for the year, while four may be needed in total if inflation improved. Strong data could encourage the Fed to announce another rate hike at its upcoming June meeting.

The data stoked speculation the Fed will hike rates two more times this year as it has flagged but doubts returned to the market after the FOMC minutes showed most policymakers believe the Fed should start reducing its US$4.5 trillion balance sheet this year, a move that would amount to tightening monetary policy.

Later on Friday, the US nonfarm payrolls report is expected to show an increase of 180,000 jobs in March, compared with 235,000 in February, according to economists polled by Reuters, which could reinforce expectations that the Federal Reserve will deliver two more interest rate increases this calendar year.

The personal consumption expenditures index, a measure of inflation watched by the Fed, rose 2.1 percent year-on-year in February, the largest gain in almost five years, while a core PCE index, which excludes volatile energy and food prices, rose 1.8 percent.

The bond holdings can be gradually reduced by letting the bonds mature over a period of years.

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"While the balance sheet commentary was a bit more hawkish than expected, the outlook for rates was more in line with what we had before", said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

USA stock futures turned higher Thursday following a sudden turn down in Wednesday's trading after the Federal Reserve committed to further monetary tightening in 2017.

Wall Street went into a sudden reversal after the minutes were published, erasing what had earlier been jump of some 200 points for the Dow Jones industrials index.

The minutes of the March meeting also showed policy board members saw "considerable uncertainty" about the effects Donald Trump's pledged tax-cut and infrastructure spending stimulus would have on the U.S. economy. The employment sub-index, measuring trend of employment within the services sector, fell to its lowest level in 8 months while prices paid fell by its most in 4 years.

On inflation, the minutes showed that some Fed officials anxious that if unemployment, now at a low of 4.7 percent, fell even further, it could pose a "significant upside risk" of higher inflation. In March, the Fed raised rates by 25 basis points.

Perhaps it wasn't the Fed's talk of shrinking its bloated balance sheet that had equity market investors running for cover. The next meeting is May 2-3.

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