Federal Reserve officials saw “little evidence” late last month that US inflation pressures were easing, and steeled themselves to force the economy to slow down as much as needed to control the surge in prices, according to the minutes of their July 26-27 policy meeting.
While not explicitly hinting at a particular pace of coming rate increases, beginning with the September 20-21 meeting, the minutes released on Wednesday showed policymakers committed to raising rates as high as necessary to bring inflation under control, and acknowledging that 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, notably housing, had begun to slow under the weight of tighter credit conditions, the labour market remained strong and unemployment was at a near-record low.
On the metric that mattered most, however, Fed officials at least as of late July had registered little progress.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said. Though some inflation reduction might come through improving global supply chains or drops in the prices of fuel and other commodities, some of the heavy lifting would also have to come by imposing higher borrowing costs on households and businesses.
“Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures,” the minutes said.
The pace of future hikes would depend, the minutes said, on incoming economic data, as well as Fed assessments of how the economy was adapting to the higher rates already approved.
Some participants said they felt rates would have to reach a “sufficiently restrictive level” and remain there for “some time” in order to control inflation, which is running at a four-decade high.
In a glimpse of the emerging debate at the central bank, “many” participants also noted a risk that the Fed “could tighten the stance of policy by more than necessary to restore price stability”, a fact that they said made sensitivity to incoming data all the more important.
After the release of the minutes, traders of futures tied 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-basis-point increase.
The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.5%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.
For the Fed to scale back its rate hikes, inflation reports due to be released before the next meeting would likely need to confirm that the pace of price increases was declining.
Data since the Fed’s July policy meeting showed annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that would argue for the smaller 50-basis-point rate increase next month.
But other data released on Wednesday showed why that remains an open question.
Core US retail sales, which correspond most closely with the consumer spending 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 United Kingdom, seemed to prompt investors in futures tied to the Fed’s target policy interest rate to shift bets in favor of a 75-basis-point rate hike next month.
Meanwhile, a Chicago Fed index of credit, leverage and risk metrics showed continued easing. That poses a dilemma for policymakers who feel that tighter financial conditions are needed to curb inflation.
Job and wage growth in July exceeded expectations, and a recent stock market rally may show an economy still too “hot” for the Fed’s comfort.