(Adds market reaction, details from minutes in paragraphs 8, 10-15)
By Howard Schneider and Michael S. Derby
WASHINGTON, Aug 16 (Reuters) - Federal Reserve officials were divided over the need for more interest rate hikes at the U.S. central bank's July 25-26 meeting, with "some participants" citing the risks to the economy of pushing rates too far even as "most" policymakers continued to prioritize the battle against inflation, according to minutes of the session that were released on Wednesday.
"Participants remained resolute in their commitment to bring inflation down to the ... 2% objective," the minutes said of a meeting in which policymakers on the Federal Open Market Committee unanimously agreed to raise the benchmark overnight interest rate to the 5.25%-5.50% range. "Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy."
Yet cautionary voices about the effects of continued monetary tightening appeared to play a more prominent role in the debate at last month's meeting, an indication that the spread of opinion at the Fed has widened as policymakers weigh evidence that inflation is falling and judge the potential damage to jobs and economic growth if rates are raised higher than necessary.
A "couple" of participants, for example, advocated leaving rates unchanged in July.
The group also "discussed several risk-management considerations that could bear on future policy decisions," the minutes said. Though a majority kept inflation as the paramount risk, "some participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate."
"These included the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated."
In general, the minutes said, Fed policymakers agreed that the level of uncertainty remained high, and that future interest rate decisions would depend on the "totality" of data arriving in "coming months" to "help clarify the extent to which the disinflation process was continuing" - a possible indication of a more patient approach to any further rises in borrowing costs.
U.S. Treasury yields hit session highs after the release of the minutes while U.S. stocks extended losses. The dollar was trading higher against a basket of currencies.