"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 (.DXY) was trading higher against a basket of currencies.

'TENTATIVE SIGNS'

The July meeting was held before the release of data that showed key price measures falling this summer alongside ebbing job creation.

But both the Fed staff's analysis and the views of policymakers showed a potential "soft landing" taking shape, with ongoing job gains and economic growth and some faith that inflation will continue to decline.

While participants "stressed" the need for continued progress to become comfortable that inflation would return to the Fed's 2% target, they also "cited a number of tentative signs that inflation pressures could be abating," from slowed shelter inflation to lowered measures of inflation expectations in recent surveys.

Fed staff, who present their own independently developed views of the economy to policymakers, dropped their projection for a recession later this year but continue to see inflation falling through the end of this year and next in a gradual return to the central bank's target.

Inflation, as measured by the personal consumption expenditures price index, the Fed's preferred gauge, peaked at a 6.9% annual rate in June of 2022, but had fallen to 3% as of June of this year.

Fed staff said they expected a "step-down" in underlying prices over the second half of this year.

Investors in contracts tied to the federal funds rate are betting heavily that the Fed won't raise its policy rate again during the current tightening cycle. They put nearly a 90% chance on the prospect that the central bank would leave rates unchanged at its Sept. 19-20 meeting, largely unchanged from before the release of the minutes.