The Federal Reserve wrestled with whether to nod to financial market volatility and a weakening global economy in its policy statement last month, but opted not to out of worry it could send an unwarranted signal of pessimism.

Minutes of the US central bank’s October 28th-29th meeting released this evening also indicated a vigorous debate among policymakers over how much weight to give to signs inflation expectations were slipping, potentially undermining their effort to bring the pace of price increases back up to their target.

“Many participants observed that the committee should remain attentive to evidence of a possible down shift in longer-term inflation expectations,” the minutes said. “Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”

The dollar weakened against the euro and the yen after the minutes were released, while bond prices rose as investors tempered expectations of when US interest rates may rise.

“The wording would suggest greater pessimism,” said Robbert Van Batenburg, director of market strategy at Newedge in New York. “They didn’t want to create fears.”

The statement Fed officials issued after their gathering largely sloughed off a mid-October market meltdown and ebbing growth in other developed economies, with the central bank restating confidence the US economy would continue to make progress.

But the minutes reflected a complex discussion. Fed staff cut their estimates for near-term US economic growth, and policymakers debated both the impact of slowing growth overseas and possible limits on their ability to respond if needed.

A solid core of officials said the Fed needed to remain vigilant that public and market expectations about inflation could shift down - a worrisome development that might increase the risk of a damaging period of stagnation or outright deflation. The soft pace of inflation has become a central concern at the Fed and other major central banks.

In evaluating October’s market volatility and renewed fears of deflation in Europe, the Fed decided that the better part of valour was to downplay the possible consequences.

Mentioning the market sell-off, for example, “risked the possibility of suggesting greater concern on the part of the committee than was actually the case,” the minutes said. A similar debate and conclusion surrounded the weakening economies in Europe, Japan and China.

The Fed next meets in mid-December, and officials will issue updated economic projections.

Reuters