By Howard Schneider
WASHINGTON (Reuters) -Even before U.S. inflation data on Wednesday came in hotter than expected, Federal Reserve officials had begun worrying last month that progress might have stalled and a longer period of tight monetary policy could be needed to tame the pace of price increases.
"Some" officials at the Fed's March 19-20 meeting even raised the possibility that the current 5.25%-5.50% policy rate was "less restrictive than desired, which could add momentum to aggregate demand and put upward pressure on inflation," according to minutes of the meeting released on Wednesday, the sort of logic that could be used to defend another rate hike.
Projections issued at that meeting showed no policymakers had penciled in a higher policy rate, and the two-day session took place in the context of record high stock prices and falling market interest rates.
But the comments in the minutes reflect the complicated dynamics Fed officials are navigating as they debate whether the greater risk is for monetary policy to remain too tight for too long and damage the economy, or for the central bank to ease too soon and fail to return inflation to its 2% target.
If Fed officials started the year with a bias towards cutting rates in light of inflation's fast decline last year, the minutes indicate that the burden of proof may be shifting. As of last month's meeting, they projected cutting rates by three-quarters of a percentage point this year.
"Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2%," the minutes said, a sentiment that may have been bolstered by consumer price index (CPI) data released earlier that showed another surprise jump in inflation.
Some Fed officials continued to argue that important items like housing inflation would begin to slow, with "several" saying that increases in productivity could allow growth to remain strong while inflation continued to fall.
"Many" of them said they were stymied "in assessing how recent immigration trends would influence" the economy, a factor that Fed staff took into account in strengthening their outlook for growth this year.
But the minutes overall indicated growing Fed concern about the status of an inflation fight that seemed well in hand at the start of the year.
"Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months," while reiterating they would need greater confidence in continued disinflation before cutting rates, the minutes said.
INFLATION DATA
The Fed has raised its policy rate by 5.25 percentage points since March of 2022 to combat a surge in inflation that peaked in June of that year.
The latest CPI data, if anything, further undermined any certainty around inflation's decline.
The U.S. Labor Department reported that the CPI accelerated to a 3.5% annual rate in March from 3.2% in February, and a separate "core" measure excluding food and energy prices stalled at 3.8%.
Fed policymakers are debating when to lower the central bank's benchmark overnight interest rate from the current range, where it has been since last July. They meet next on April 30-May 1.
After the release of the CPI data, investors pushed out their bets on the timing of an initial rate cut to September from June.
The minutes also showed the vast majority of Fed officials judged it would be prudent to slow the runoff of the central bank's massive holdings of Treasury bonds and mortgage-backed securities "fairly soon."