Fed saw ‘significant’ inflation risk that may merit more rate hikes, minutes show

WASHINGTON – Federal Reserve officials at their policy meeting in July largely remained concerned that inflation would fail to recede and that further interest rate increases would be needed.

At the same time, cracks in that consensus were also becoming more apparent.

“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the United States central bank’s July 25-26 policy meeting published on Wednesday.

But two Fed officials favoured leaving rates unchanged or “could have supported such a proposal” instead of the rate hike the Federal Open Market Committee (FOMC) ultimately authorised at the conclusion of the meeting, the minutes showed.

“Minutes from the July FOMC meeting frame the emerging tension between inflation data that is moderating faster than the Fed anticipated and growth data that is coming in stronger than the Fed anticipated,” Evercore ISI economists said in a note after the release.

The July rate hike brought the target range for the Fed’s benchmark rate to 5.25 per cent to 5.5 per cent, the highest level in 22 years.

This marked a resumption of increases after officials left rates unchanged at the previous gathering for the first time since they began tightening in early 2022.

While quarterly projections last updated in June showed that most officials at the time favoured two more increases in 2023, chair Jerome Powell emphasised after the July decision that the Fed would take things meeting by meeting.

“We intend, again, to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2 per cent target, and we’re prepared to further tighten if that is appropriate,” Mr Powell told reporters on July 26.

Treasury yields rose after the release of the minutes on Wednesday, while the S&P 500 index extended its losses and the US dollar added to its gains as the Fed minutes were seen as more hawkish than expected.

The record of the July gathering added colour around public remarks from officials on the FOMC in recent weeks, which have suggested that the strong degree of consensus underpinning the aggressive tightening campaign of the last 1½ years may be starting to fray.

Some, such as Philadelphia Fed president Patrick Harker, have indicated the central bank might not need to keep raising interest rates. Others, including Fed governor Michelle Bowman, have taken the opposite view.

“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” the minutes said.

Investors currently do not expect another rate increase in 2023, according to futures contracts, although the implied odds of a hike at the Oct 31 to Nov 1 meeting are higher than those for their next meeting from Sept 19 to 20.

They continue to see the Fed commencing with rate cuts in 2024, with the benchmark seen falling to around 4.25 per cent by the end of 2024.

Fed watchers will listen for a possible signal at the Kansas City Fed’s annual Jackson Hole conference in Wyoming next week, where Mr Powell is expected to deliver remarks.

Key economic data published since the July gathering has mostly supported the notion that Fed officials will have some time to deliberate over the need for more tightening.

Quarterly releases on employment costs and unit labour costs showed a deceleration in the pace of increases.

A measure of consumer prices excluding food and energy logged the smallest back-to-back monthly advances in more than two years.

The minutes also conveyed some optimism about the outlook as the Fed’s influential staff economists “no longer judged that the economy would enter a mild recession towards the end of the year”.

Still, they expected that economic growth over the next two years “would run below their estimate of potential output growth”.

“This would lead to a small increase in the unemployment rate relative to its current level”. BLOOMBERG