Fed minutes show debate on changing rate guidance heating up

By Michael Flaherty and Jonathan Spicer

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve's debate on its interest rate guidance heated up last month, with several officials showing concern about misleading investors and pushing for a more data-dependent approach, according to minutes from its last policy meeting.

But as the Fed grapples with how to communicate its view on hiking rates, the minutes also show concern about the rising dollar, slowing inflation, and economic turmoil in Europe and Asia, factors that support the U.S. central bank's current of keeping policy accommodation in place for the near future.

"The concern was raised that the reference to 'considerable time' in the current forward guidance could be misunderstood as a commitment rather than as data dependent," said the minutes of the Fed's Sept. 16-17 meeting, which were released on Wednesday.

The U.S. dollar, which has risen in the last 12 weeks, trimmed gains from earlier on Wednesday. Yields on Treasury bonds dipped, while U.S. stocks rose, suggesting investors read the minutes as dovish.

In its Sept. 17 statement, the Fed's policy-setting committee repeated its assurance that rates would stay ultra-low for a "considerable time" after a bond-buying stimulus program ends, a pledge it has kept in place since March. The bond buying program is set to end this month.

The extent of the debate present in the minutes suggests the committee could move as soon as its upcoming meeting on Oct. 28-29 to change its description of when it may begin to lift rates. It has held benchmark overnight borrowing costs near zero since December 2008.

The minutes also showed signs of concern from a "couple" of meeting participants that the strengthening U.S. dollar could hit parts of the economy and cause longer-term inflation expectations to move slightly lower.

In an unusual move, the Fed acknowledged its concern that the market seems to be expecting a slower pace of interest rate hikes than the U.S. central bank itself is predicting.

"The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants' assessments ...," according to the minutes.

(Reporting by Michael Flaherty and Jonathan Spicer; Editing by Tim Ahmann and James Dalgleish)