Fed minutes show further rate hikes coming, but the pace may slow

The Federal Reserve Board building on Constitution Avenue is pictured in Washington, USA on 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 US inflationary pressures were easing and prepared to force the economy to slow as much as necessary to control the surge. prices, according to the minutes of the political meeting of 26-27 July.

While not explicitly hinting at a particular pace for the next rate hikes, starting in September. 20-21 meeting, the minutes released Wednesday showed that policymakers pledged to raise rates as needed to keep inflation in check, and acknowledging that they would have to plan for lower spending and lower overall growth for that to happen.

At the July meeting, Fed officials noted that while certain sectors of the economy, particularly housing, had started to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was to an almost record level.

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On the metric that mattered most, however, Fed officials had made little progress at least by the end of July.

“Participants agreed that to date there was little evidence that inflationary pressures were easing,” the minutes read. While some reduction in inflation may come from improving global supply chains or falling prices for fuel and other commodities, part of the hefty increase is also expected to come from imposing higher financial burdens on households and businesses.

“Participants stressed that a slowdown in aggregate demand would play an important role in reducing inflationary pressures,” the minutes read.

The pace of future hikes would depend, the minutes read, on incoming economic data, as well as the Fed’s assessments of how the economy is adjusting to the higher rates already approved.

Some participants said they felt that rates should reach a “sufficiently tight level” and remain there for “some time” in order to control inflation, which has been peaking for four decades.

In a look at the emerging central bank debate, “many” participants also noted the risk that the Fed “could tighten the policy stance more than necessary to restore price stability,” a fact that, according to them, has made sensitive. to incoming data all the more important. [nL1N2ZS1FQ]

Following the release of the minutes, Fed policy rate futures traders saw a half percentage point rate hike as most likely in September, with federal funds futures prices reflecting only a 40% probability of a increase of 75 basis points.

DATES COMING

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

For the Fed to cut its rate hikes, inflation reports that are expected to be released before the next meeting should likely confirm that the pace of price increases is slowing.

Data from the Fed policy meeting in July showed that annual consumer price inflation fell that month to 8.5% from 9.1% in June, a fact that would explain the smallest rate hike of 50 basis points. next month.

But more data released on Wednesday showed why this remains an open question.

Core retail sales in the US, which more closely match the consumer spending component of gross domestic product, were stronger than expected in July. That data, coupled with the headline of the shock value that inflation had passed the 10% mark in the UK, seemed to induce investors in futures tied to the Fed’s benchmark interest rate to shift bets in favor of an interest rate. 75 base points hike next month. Read more

Meanwhile, a Chicago Fed index on credit, leverage and risk metrics showed continued easing. This poses a dilemma for policy makers who believe that tighter financial conditions are needed to curb inflation.

Employment and wage growth in July exceeded expectations and a recent equity market rally could show an economy that 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 Federal Reserve, monetary policy and economics, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economic reporter, and local Washington Post staff.

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