According to recently leaked minutes from the July policy meeting, Federal Reserve members expected US inflation will continue high for “some time” and noted that there is “little sign” that it is lessening.
The minutes, which were made public on Wednesday, revealed that policymakers were committed to hiking rates as high as required to manage inflation and that, in order to do so, they would have to tolerate slower economic growth.
Despite a swift succession of big interest rate rises that have brought the Fed’s policy rate from almost zero to 2.5 percent, inflation has been running high and held close to a 40-year high at 8.5 percent in July.
The policy meeting minutes from July 26–27 included no mention of a certain rate of interest rate hikes for future meetings, including the one slated for late September.
Although they agreed that inflation was still “well over” the central bank’s two percent annual objective, Fed members highlighted in the minutes that slower growth may “set the scene” for it to do so.
However, the decision-makers made it plain that they intended to keep hiking rates for the time being in order to slow the economy.
The job market was still robust, and unemployment was at a close to record low as of the July meeting, according to Fed officials, despite the fact that certain aspects of the economy, most notably the housing sector, had started to slow down as a result of tighter lending conditions.
But as least as of late July, Fed policymakers had seen no improvement on the most important statistic.
The minutes said that “participants agreed that there was little indication to date that inflation pressures were decreasing.” Participants said it would probably take some time before inflation reached the committee’s target level.
Although better global supply networks or decreases in the cost of gasoline and other commodities may help to reduce inflation in certain cases, greater borrowing costs for individuals and companies will also be necessary in other cases.
The minutes said that “participants stressed that a slowdown in aggregate demand would play a crucial role in easing inflation pressures.”
According to the minutes, the rate of future rate increases would be determined by the economy’s ability to adjust to the higher rates previously authorised as well as new economic data.
Some participants believed that in order to stop inflation from reaching a four-decade high, rates would need to hit a “sufficiently restrictive level” and stay there for “some time.”
‘Many’ participants also underlined a possibility that the Fed ‘may tighten the stance of policy by more than required to restore price stability,’ which they said made attention to incoming data even more crucial. This provided a window into the developing debate at the central bank.
Following the publication of the minutes, market participants in futures contracts linked to the Federal Reserve’s policy rate believed that a half-point rate rise in September was more plausible, with a 75-basis-point increase having only a 40% chance of occurring.
In order to achieve its goal range of 2.25 to 2.50 percent, the Fed increased its benchmark overnight interest rate by 225 basis points this year.
Rate increases of 50 or 75 basis points are often anticipated from the central bank for the next month.
Inflation statistics scheduled for publication before the next meeting would probably need to demonstrate that the rate of price rises was slowing down for the Fed to dial back its rate hikes.
Data collected after the Fed’s policy meeting in July revealed that annual consumer inflation decreased in that month from 9.1 percent in June to 8.5 percent, which would support next month’s rate rise being reduced by 50 basis points.
But additional information made public on Wednesday demonstrated why that is still up for debate.
Core retail sales in the United States, which most closely reflect the consumer spending portion of the GDP, outperformed forecasts in July.
This information, together with the shocking headline that the UK’s inflation rate had surpassed 10%, seemed to influence investors in futures contracts linked to the Federal Reserve’s target policy interest rate to change their wagers in favour of a 75 basis-point rate increase next month.
A Chicago Fed index of credit, leverage, and risk measures revealed further softening in the meanwhile. Policymakers who believe that tighter financial conditions are required to reduce inflation are presented with a conundrum by this.
Overachieving job and pay growth in July and a recent stock market boom may indicate that the economy is still too “hot” for the Fed to feel comfortable.