Aug. 26 (Bloomberg) -- Federal Reserve policy makers agreed this month that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision.

``A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets,'' according to minutes of the Federal Open Market Committee meeting released today. At the same time, officials agreed that the timing of any move will depend on economic and financial developments.

The minutes show a debate between Fed officials concerned about inflation, which accelerated last month to the fastest 12- month pace in 17 years, and those who say price gains will ease in response to the economic slowdown and drop in commodities.

The Fed left the benchmark lending rate unchanged at 2 percent on Aug. 5 and signaled that weak employment and financial instability will delay an increase in short-term borrowing costs.

``Many participants noted that the financial system remained fragile, with some expressing continued concern about the possibility of an adverse feedback loop'' where tighter credit conditions push the housing market even lower, the minutes of the meeting said.

``In contrast, several other participants suggested that the risks to the financial system had receded' and said that credit conditions were ``broadly consistent'' with periods of weak growth or recession,'' the minutes said.

Plosser Dissent

Philadelphia Federal Reserve Bank President Charles Plosser dissented against an options program on the Term Securities Lending Facility, which the Fed announced July 30.

Chairman Ben S. Bernanke said the Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective'' in his remarks opening the Jackson Hole, Wyoming, monetary conference on Aug. 29.

``Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments,'' the minutes said.

With the economy faltering, U.S. central bankers are trying to reconcile both aspects of their dual mandate to limit inflation while sustaining economic growth that maximizes employment.

Job Losses

Some 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending. Economists expect annualized rates of growth of just 1.2 percent in the third quarter and 0.45 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey.

The consumer price index rose 5.6 percent for the 12 months ending in July. The Fed's preferred benchmark, the 12-month change in the personal consumption expenditures price index, minus food and energy, has been at 2 percent or higher since March 2004. Adjusted for the core PCE rate, the real federal funds rate is slightly below zero, the lowest since November 2004.

The U.S. Treasury now has authority to provide any necessary financial support for the firms, making access to Fed loans less urgent. Still, shares of the mortgage finance companies are lower as investors conclude that government involvement would come at a cost to equity investors.

Shares of Washington-based Fannie Mae have fallen 48 percent during the last month, while McLean, Virginia-based Freddie Mac has declined 51 percent.

``Heightened investor apprehension about the viability of Fannie Mae and Freddie Mac had eased following legislative action, but pressures on these firms continued,'' the minutes said.

Housing markets remain weak. Some 4.67 million houses and condos were on sale in July, according to the National Association of Realtors. The 11.2 months supply, measured by the current sales pace, matches a prior record.

A five- to six-month supply usually marks a stable market, according to the association. The glut of unsold homes pushed the median sales price down 7.1 percent last month compared with July 2007.

Dallas Federal Reserve Bank President Richard Fisher dissented at the August meeting, preferring an increase in rates.

Fisher ``dissented because he favored an increase in the target federal funds rate to help restrain inflation,'' the minutes said.

Futures markets show a 92 percent probability of no change in interest rates when the FOMC next meets Sept. 16., and an 83 percent chance of no change at the October 28-29 meeting.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netScott Lanman in Washington at slanman@bloomberg.net

Last Updated: August 26, 2008 14:00 EDT