Fed fretted over rising inflation pressure: minutes

By David Lawder

WASHINGTON (Reuters) - Federal Reserve policy-makers fretted at their most recent meeting that growing inflation risks may require an interest rate hike, but agreed the outlook for both prices and growth was still too uncertain, minutes of the meeting showed.

"With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed one member thought that policy should be firmed at this meeting," the Fed said in the minutes released on Wednesday .

"However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus timing and magnitude of future policy actions was quite unclear," the Fed added.

At the June 24-25 meeting, the Fed left its benchmark federal funds rate unchanged at 2 percent.

The minutes showed members of the Federal Open Market Committee generally agreed that risks to growth had diminished somewhat since their last meeting in April, when they cut rates, but growth risks were still tilted to the downside.

The minutes showed that members of the FOMC saw continued strong increases in energy and commodity prices prompting a "difficult adjustment process" involving both lower growth and higher near-term inflation rates.

"Members were also concerned about the heightened potential in current circumstances for an upward drift in long-run inflation expectations," the Fed said.

Dallas Fed President Richard Fisher, the lone dissenter in the vote to keep rates on hold, expressed concerns about plans by businesses to pass through higher input costs to final prices to "accommodate" inflationary pressures.

"Overall, Mr. Fisher viewed inflation expectations as becoming less well anchored," the minutes said.

DOLLAR FIRMS, STOCKS RISE

The renewed hints at future rate hikes helped to push up the dollar against the euro and the yen. The euro EUR= was trading at $1.5818

Chicago Board of Trade federal funds futures contract prices implied that investors saw about an 80 percent chance of a December rate hike after the minutes were released compared with about 68 percent on Monday night.

But most market attention was focused a $4-a-barrel drop in oil prices, which sent stocks up sharply, and on Fed Chairman Ben Bernanke's second day of testimony before Congress, in which he said fighting inflation was a top priority.

Bernanke also said it was critical the government restore confidence in mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which has been a key market focus in the past week.

RBS Greenwich Capital's chief international strategist Alan Ruskin said a softening of oil prices may be the only thing that can ease the Fed's policy dilemma..

"The simple truth is that inflation suggests the Fed should tighten substantially, and financial indicators suggest they should ease, and a Fed caught in this vice can not do either," he said in a research note. "Equities are tossing aside the hawkish talk, believing that the world has moved on since the last meeting."

(Reporting by David Lawder; Editing by Neil Stempleman)