By Jason Lange and Lindsay Dunsmuir
WASHINGTON (Reuters) - Federal Reserve policymakers worried last month that a global slowdown and financial market selloff could hurt the U.S. economy and considered changing the central bank's planned interest rate hike path for 2016.
Although most of the policymakers still expected to raise rates this year and even discussed a hike at the Jan. 26-27 policy meeting, they were divided over how to interpret the financial market volatility, according to the minutes from the meeting released on Wednesday.
That suggested the Fed was backing away from the four rate hikes that were signalled for this year in December, when it hiked rates for the first time in nearly a decade.
The policymakers discussed "altering their earlier views of the appropriate path for the target range for the federal funds rate," but most judged it "premature" to make big changes to their outlook, according to the minutes.
They added that they would closely monitor global economic developments as well as oil and stock prices.
"A number of participants were concerned about the potential drag on the U.S. economy from the broader effects of a greater-than-expected slowdown in China and other (emerging market economies)," according to the minutes.
Wall Street's scepticism that the Fed would raise rates at all this year increased after the release of the minutes.
Prices for fed funds futures implied investors saw a roughly 30 percent chance of a hike in December and less than that at prior meetings, according to CME Group. Bets on a December hike were about 40 percent before the minutes were released.
A number of Fed policymakers said the recent moves in financial markets "were difficult to reconcile" with signs of underlying U.S. economic strength. But many of them saw growing risks to the economy and some said the financial market stress may be "roughly equivalent" to further monetary policy tightening, which would reduce the need for rate increases.
After a lengthy discussion of global economic risks, they agreed that economic uncertainty had increased and worried about the impact of persistent turmoil in financial markets.
"If the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks" to the economy, according to the minutes.
CHINA CONCERNS
Global financial markets have remained volatile since the Fed's January meeting. Mexico, one of the top U.S. trading partners, raised interest rates on Wednesday to counter a weakening of the peso against the dollar.
In the minutes, policymakers noted that China's problems could weigh on both Mexico and Canada, another top U.S. trading partner.
Oil prices were still in freefall when the policy-setting Federal Open Market Committee met last month, but on Wednesday they rose as much 7 percent after Iran voiced support for a Russia-Saudi-led move to limit crude production.
Data from the Fed on Wednesday showing a strong jump in U.S. industrial output in January also bolstered the U.S. growth outlook.
Prices of U.S. Treasuries pared losses after the release of the minutes, while the dollar weakened against the yen. U.S. stock indexes closed sharply higher.
The minutes also showed the FOMC reauthorised foreign currency swap arrangements with a number of other central banks.
Fed Chair Janet Yellen said last week the U.S. central bank still expected to raise rates gradually in 2016 but acknowledged a weakened global economy and a steep slide in stock markets was tightening financial conditions faster than the Fed wants.