Divisions at the U.S. Federal Reserve over how soon to reverse course on monetary policy emerged more clearly last month, although the central bank appeared intent to complete a $600 billion bond-buying plan.
A few officials at the Fed's March 15 policy-setting meeting thought a stronger economy could warrant tightening monetary conditions this year, although others believed the Fed could maintain its ultra-loose stance beyond 2011, minutes of the meeting released on Tuesday said.
Similarly, some members of the Fed's policy panel thought the central bank should be prepared to cut short its bond purchases if growth quickened or inflation threatened to move higher. However, several others did not anticipate any need for adjustments, the minutes said.
The dollar briefly rose to its highest level in more than five months against the yen and gained versus the euro as traders seized on the comments showing some Fed officials believed tighter policy might be needed this year.
The split between policy hawks and doves reflects the challenge the Fed faces in timing the withdrawal of its massive support for the economy. The central bank cut overnight interest rates to near zero in December 2008 and then bought $1.7 trillion in mortgage-related and government debt.
It launched its latest bond-buying plan in November.
Tightening U.S. financial conditions too early could stifle a tentative economic recovery, while waiting too long could unleash a surge of hard-to-contain inflation.
In a policy statement at the conclusion of its meeting on March 15, the Fed said the economy was on a firmer footing but that high unemployment and still-low inflation warranted continuing its support for the recovery.
Despite impatience among its ranks, top officials at the Fed have given no sign they intend to curb bond buying or move with any haste to tighter financial conditions.
In that regard, the Fed stands in contrast to other major central banks around the world, which are on the cusp of raising benchmark borrowing costs to counter rising prices. The European Central Bank is expected to bump rates higher on Thursday.
The Fed meeting minutes showed officials increasingly concerned about a surge in energy and commodity prices and the possibility an inflationary psychology might take root.
They concluded that the current bout of higher inflation would be temporary, but vowed to keep a watchful eye on whether consumers and businesses were beginning to expect higher inflation in the future. Such expectations could become self-fulfilling if built into wage and price decisions.
A significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which would be costly to eradicate, the minutes said.
Staff told policymakers they could bring the bond-buying program to an end as planned June 30 without tapering purchases and not cause any market disruptions.
Several Fed officials said turmoil in the Middle East and the prospect of higher oil prices had made them shift their views of inflation risks to the upside.
As a result of these uncertainties, policymakers vowed to plan for an eventual exit from exceptionally easy monetary conditions based on a range of different economic scenarios.
(Reporting by Mark Felsenthal and Glenn Somerville; Editing by Neil Stempleman and Dan Grebler)