Fed minutes show more rate hikes in pipeline, but pace may slow

The Federal Reserve 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 inflationary pressures in the United States were easing and strengthening to force the economy to slow in order to to control soaring prices, according to the minutes of their Political Meeting of July 26 and 27.

Without explicitly hinting at a particular pace of rate hikes to come, starting with the Sept. 20-21 meeting, minutes released Wednesday showed U.S. central bank policymakers committed to raising rates as well. higher than necessary to bring inflation under control – even as they began to recognize more explicitly the risk of going too far and dampening economic activity too much.

“Participants agreed that there was little evidence to date that inflationary pressures were easing,” the minutes read.

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Although some reduction in inflation, which has reached four-decade highs, may come from improved global supply chains or lower prices for fuel and other commodities, much of the heavy lifting would have to come from imposing such high borrowing costs on businesses and households that they would spend less, according to the minutes.

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

Yet despite this arch-tone on inflation as the primary concern, the minutes also signaled what will be an important dimension of the Fed’s debate in the months to come – when to slow the pace of rate hikes and how to tell if hikes rates have exceeded the point needed to beat the rise in prices.

Although generally deemed “dovish” by traders who raised their bets, the Fed would only approve a half-percentage-point hike at the September meeting, Bob Miller, head of fundamental fixed income of the Americas at BlackRock, said the minutes appear to give the Give more leeway to react as the data comes in.

“The intended message was much more nuanced” and reflected a need for “optionality” from a central bank trying to assess conflicting economic data and shocks, he said. “Implanting some conditionality going forward seems reasonable given the unprecedented nature of this particular round.”

The pace of rate hikes could indeed ease as early as next month, with the minutes indicating that, given the time needed to assess the impact of tighter policy on the economy, “it would become appropriate to at some point” to move from broad, 75 basis point hikes approved at the Fed’s June and July meetings, down to hikes of half a percentage point and possibly a quarter point percentage.

But the ultimate level of interest rates still seemed very much in play.

“Some” participants said they believed rates would need to reach a “sufficiently tight level” and stay there “for a while” in order to control inflation that was proving much more persistent than expected.

“Many,” on the other hand, noted the risk that the Fed “could tighten the policy stance more than necessary to restore price stability,” especially given how long it takes monetary policy to change economic behavior.

Referring to rate hikes already telegraphed by the Fed, “participants generally felt that the bulk of the effects on real activity had yet to be felt,” the minutes said.

At the July meeting, Fed officials noted that while parts of the economy, notably housing, had begun to slow under the weight of tightening credit conditions, the labor market remained strong and unemployment was at near record highs.

ENTRY DATA

The Fed has 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 rates are generally expected to rise next month of 50 or 75 basis points.

For the Fed to scale back its rate hikes, the inflation reports due out before the next meeting would likely confirm that the pace of price increases is slowing. Inflation on the Fed’s preferred measure is more than three times the central bank’s 2% target.

Data since the Fed’s monetary policy meeting in July showed that annual consumer inflation fell this month to 8.5% from 9.1% in June, a fact that would argue for a further increase. low rates of 50 basis points next month.

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

Core retail sales in the United States, which best matches the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock stock headline that inflation had breached the single digit mark in the UK, appeared to prompt investors in futures tied to the Fed’s key interest rate target to change bets. in favor of a rate of 75 basis points. hiking next month. Read more

Meanwhile, a Chicago Fed Credit, Leverage and Risk Index showed continued easing. This poses a dilemma for policymakers who believe that tighter financial conditions are needed to curb inflation.

Job and wage growth in July exceeded expectations, and a recent stock market rally could show an economy still too “hot” for the Fed’s comfort. Read more

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Reporting by Howard Schneider; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

howard schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduated from the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, business reporter and local Washington Post staffer.

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