Why Fed policymakers were torn on the latest rate hike

Some Federal Reserve officials favored holding interest rates steady in July, while most saw "significant upside risks to inflation" that could require even higher interest rates, new minutes published on Wednesday show.

Why it matters: The Fed is entering a more complicated era, where inflation is showing signs of cooling, though price pressures remain. That may lead to more division among policymakers about how much more the Fed needs to hike rates and slow the economy.

Catch up quick: The Fed raised interest rates by a quarter-percentage point at its late July meeting, resuming a series of actions aimed at slowing the economy and cooling inflation after a pause in June.

The intrigue: While the decision to hike rates was ultimately unanimous, minutes from the central bank's July 25-26 policy meeting released on Wednesday show the decision stirred debate among the committee of policymakers.

• "A couple of participants indicated" that they favored leaving interest rates unchanged, "or that they could have supported such a proposal," the minutes say.
• Those officials said keeping rates steady would allow more time for the Fed to evaluate progress on its efforts to cool inflation, per the minutes.
• Meanwhile, "a number of participants" said it was important that the Fed balanced the "risk of an inadvertent overtightening of policy against the cost of an insufficient tightening."
• In other words, the risks that the Fed would go too far in its efforts to slow the economy, and potentially cause a bigger slowdown than necessary, were becoming just as big as those associated with the Fed not doing enough to quell inflation.

Of note: Fed officials noted "upside risks to inflation,” citing a range of scenarios, including re-accelerating commodity prices, that could lead to "more persistent elevated inflation.”

Where it stands: A stretch of economic data suggests the economy and job market remain resilient, alongside cooling inflation pressures — a combination that continues to surprise a number of economists.

• The Consumer Price Index, for instance, has plunged from its 9% peak seen last year. The core measure, which excludes energy and food costs and is closely watched by Fed officials for clues about underlying inflation, has also slowed.

What's next: Those positive developments have led some Wall Street economists to conclude the Fed is likely near the end of its rate hiking campaign.

• The minutes from the latest policy meeting, however, offer no clear answer.
• Officials acknowledged the encouraging news on inflation, but said they would need to "see more data" and "further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating."
• Future decisions about rate hikes should "depend on the totality of the incoming information and its implications for the economic outlook and inflation as well as for the balance of risks," the minutes stated.

What to watch: As Fed chair Jerome Powell said at a press conference last month, staff economists at the central bank no longer anticipated the economy will enter a recession this year.

• However, they expected economic growth to slow, "leading to a small increase in the unemployment rate relative to its current level," the minutes say.