Fed minutes show that more rate hikes are coming, but the pace may slow

The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid/File Photo

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WASHINGTON, Aug 17 (Reuters) – Federal Reserve officials saw “little evidence” late last month that U.S. inflationary pressures were easing, steeling themselves to force the economy to slow as much as necessary to control rising prices, according to minutes from their political meeting on 26-27 July.

Although it did not explicitly indicate a particular pace for future interest rate increases, from the meeting on 20-21 September, the minutes released on Wednesday showed policymakers committed to raising interest rates as high as necessary to bring inflation under control, acknowledging they would have to engineer less spending and lower overall growth for that to happen.

As of the July meeting, Fed officials noted that while some parts of the economy, particularly housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.

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On the metric that mattered most, however, as of late July at least, Fed officials had registered little progress.

“Participants agreed that to date there was little evidence that inflationary pressures were abating,” the minutes said. Although some inflation reduction may come through better global supply chains or falls in the prices of fuel and other commodities, some of the heavy lifting will also have to come by imposing higher borrowing costs on households and businesses.

“The participants emphasized that a decline in aggregate demand will play an important role in reducing inflationary pressure,” the minutes say.

The pace of future hikes will depend, the minutes said, on incoming economic data, as well as the Fed’s assessments of how the economy adjusted to the higher interest rates already approved.

Some participants said they felt interest rates needed to reach a “sufficiently restrictive level” and remain there for “some time” to control inflation, which is at a four-decade high.

In a glimpse of the new central bank debate, “many” participants also noted a risk that the Fed “could tighten policy more than necessary to restore price stability,” a fact they said made sensitivity to incoming data all the more important. [nL1N2ZS1FQ]

Following the release of the minutes, traders of futures linked to the Fed’s policy rate saw a half-percentage-point rate hike as more likely in September, with Fed Funds futures prices reflecting just a 40% chance of a 75-point hike.


The Fed has raised its overnight benchmark interest rate by 225 basis points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to raise interest rates next month by either 50 or 75 basis points.

In order for the Fed to scale back its rate hikes, inflation reports to be released before the next meeting will likely have to confirm that the pace of price increases slowed.

Data since the Fed’s July policy meeting showed annual consumer inflation fell to 8.5% that month from 9.1% in June, a fact that would argue for the smaller 50 basis point rate hike next month.

But other data released on Wednesday showed why that remains an open question.

US core sales, which correspond most closely to the consumption component of gross domestic product, were stronger than expected in July. That data, along with the shock value headline that inflation had passed the 10% mark in the UK, appeared to prompt investors in futures linked to the Fed’s benchmark interest rate to shift their bets in favor of a 75 basis point rate. hike next month. read more

Meanwhile, a Chicago Fed index of credit, leverage and risk gauges continued to ease. This poses a dilemma for policymakers who feel that tighter economic conditions are needed to curb inflation.

Job and wage growth in July beat expectations, and a recent stock market rally may show the economy is still too “hot” for the Fed’s comfort. read more

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Reporting by Howard Schneider; Editing by Paul Simao

Our standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US central bank, monetary policy and the economy, educated at the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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