Federal Reserve officials agreed last month on the need to eventually dial back the pace of interest-rate hikes but also wanted to gauge how their monetary tightening was working toward curbing U.S. inflation.

“As the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” according to minutes of the Federal Open Market Committee’s July 26-27 meeting released Wednesday in Washington. 

“Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the committee could tighten the stance of policy by more than necessary to restore price stability,” the minutes showed.

Fed officials raised their benchmark interest rate by 75 basis points at that meeting for a second straight month, marking the fastest pace of tightening since the early 1980s in a battle against red-hot inflation.

Even so, the S&P 500 index of US stocks has risen about 9 per cent since the July gathering. Fed officials will have a chance to offer fresh views on the outlook during their Aug. 25-27 retreat in Jackson Hole, Wyoming.

Following the minutes release, two-year Treasury yields and the dollar pared gains, while U.S. stocks trimmed losses. Swaps traders increasingly bet that the Fed will boost rates by a half percentage point next month, rather than three-quarters of a point.

“While the FOMC minutes continue to emphasize the need to contain inflation, there is also an emerging concern the Fed could tighten more than necessary,” said Christopher Low, chief economist at FHN Financial. “There is an inkling of improvement on the supply side of the economy, there is a bit of hope in some product prices moderating, but there is still a great deal of concern about inflation and inflation expectations.”

The language used in the minutes echoed what Powell said at the press conference after the July meeting. His comments ignited the move higher in stocks when he suggested that the central bank could transition to smaller rate hikes going forward. Even so, he left the door open to another “unusually large” increase at the next meeting in September, depending on economic data to be published in the interim.

A Labor Department report published Aug. 5 -- which showed companies added 528,000 employees to payrolls last month, more than double what forecasters were expecting -- prompted investors to bet on a third straight 75-basis-point hike when the Fed meets Sept. 20-21.

At the July meeting, “participants judged that a significant risk facing the committee was that elevated inflation could become entrenched if the public began to question the committee’s resolve to adjust the stance of policy sufficiently,” according to the minutes.

But the department’s Aug. 10 readout on consumer prices showed they rose 8.5 per cent in the 12 months through July, down from the 9.1 per cent increase the month before that marked the highest inflation rate since 1981.

The softer July inflation figures gave legs to the stock-market rally as previous bets on a big rate hike in September were unwound, and investors are now assigning similar odds to a half-point or a three-quarter-point increase, according to prices of futures contracts tied to the Fed’s benchmark rate.

August numbers on jobs and consumer prices are due out before the September meeting.