FOMC July meeting minutes were released, revealing that Federal Reserve officials feel that additional interest rate hikes will be necessary over the coming months, and such hikes will continue until they see evidence that inflation has been cooled, “considerably.”
The minutes from the July 26th-27th meeting showed policymakers were committed to raising rates as high as necessary to lower inflation to their 2% target, even if that impacts consumer spending and slows economic growth.
The minutes said, “With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.”
Presently the benchmark federal funds rate sits within the neutral range of 2.25% to 2.50%, where it is judged to not be supportive of, or restrictive toward economic activity. Some officials feel however that it will need to be raised into the range which is considered restrictive toward economic activity, in order to snap back inflation to prevent inflationary forces from becoming entrenched in our economy, where they will weigh on the business sector.
Federal Reserve officials noted that the housing market has begun to slow due to the previous rate increases, however they felt that the economy overall remained healthy, and that this has kept inflation resistant to the rate increases implemented so far.
The minutes said, “Participants agreed that there was little evidence to date that inflation pressures were subsiding. They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and could remain uncomfortably high for some time.”
Although price increases eased in July, with a monthly increase flat at 0%, last week the consumer price index showed an 8.5% increase year over year, which was close to a four decade high. This led policymakers to worry that inflation could get established within the economy if consumers think the Fed has begun to waver in the face of the threat of slowing economic growth.
The minutes went on, “Participants judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently. If this risk materialized, it would complicate the task of returning inflation to 2 percent and could raise substantially the economic costs of doing so.”
Fed officials approved back to back 75 basis point interest rate hikes in the last two meetings in June and July, and indicated a third increase of that size was on the table for the September meeting, depending on how the economy appears to respond. The minutes indicated the Fed is leaning toward a 50 basis point hike in September, however they still maintained it would remain to be seen what the economic data showed at that point.
Some analysts fear that the stronger than expected retail sales data seen on Wednesday morning, as well as the robust July jobs report are setting the stage for another larger-sized rate hike in the September meeting.
Chris Larkin, managing director of trading at E*Trade noted, “The Fed minutes once again show that controlling inflation is its top priority. While it may not be as dovish as some investors hoped to see, there are indications that a slowdown in hikes is in the not-so-distant future.”
