U.S. unemployment stood at 4.3% in May, a 16-year low and well under the 4.6% that officials estimate representing maximum use of labor resources. For some, such low levels of labor market slack support their forecast that inflation will stabilize around the Fed's 2% target.

So far, it hasn't. The annual change on the Fed's preferred gauge of price pressures was 1.4% in May and the index has been almost continuously below their target more than for five years. The minutes noted that “most participants viewed the recent softness” in inflation indicators “as largely reflecting idiosyncratic factors.”

Fed officials' baseline outlook is that recent weakness in inflation “is transitory, but they have to formulate a plan if it isn't,” Coronado said.

That plan, according to one wing of the committee, would be to ease back on policy normalization and wait for prices to rise.

“A few participants who supported an increase in the target range at the present meeting indicated that they were less comfortable with the degree of additional policy tightening through the end of 2018,” the minutes said. “These participants expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2%.”

The minutes also showed a split on policy strategy, with about half the committee now supporting a run-it-hot scenario for the labor market.

“Several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.”

Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”

Investors slightly increased bets on another rate hike this year following the release of the June minutes to roughly two-in-three, according to pricing in federal funds futures contracts, after the key takeaways left policy on track for now.

September vs. December

“We continue to expect another rate hike in September followed by the announcement of the balance sheet run-off in December,” Harm Bandholz, chief U.S. economist at UniCredit Bank in New York, wrote in a note to clients. “The main risk to this outlook is the that the Fed changes the sequencing of these moves.”

The policy committee was divided over when to start a gradual tapering off of its balance sheet, leading to no decision timing, minutes from the June meeting showed:

“Several preferred to announce a start to the process within a couple of months,” the minutes said. “Some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.” The minutes reasserted their intention to begin the process “this year provided that the economy evolves broadly as anticipated.”

“It sounds like there is genuine disagreement over whether sooner or later is better,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

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