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

Federal Reserve Building on Constitution Avenue in Washington, US, March 27, 2019. REUTERS/Brendan McDermid/File Photo

WASHINGTON, Aug. 17 (Reuters) – Federal Reserve officials saw “little evidence” late last month that U.S. inflation pressures were easing, and they hardened to force the economy to slow to control the continuing rise in prices, according to the minutes of their meeting. July 26-27 policy meeting.

Although not explicitly hinting at a specific pace of an upcoming interest rate increase, starting with the September 20-21 meeting, the minutes released on Wednesday showed that US central bank policymakers are committed to raising interest rates as high as possible to curb inflation – even as they began in that. They more openly admit the risks they may go too far and limit economic activity a lot.

“Participants agreed that there is little evidence so far that inflationary pressures are abating,” the minutes said.

Although some reduction in inflation, which has been at its highest levels in four decades, may come through improved global supply chains or lower prices for fuels and other commodities, much of the heavy lifting will have to come from the imposition of these higher borrowing costs. The minutes stated that businesses and households would spend less.

The minutes stated that “the participants emphasized that the slowdown in aggregate demand will play an important role in reducing inflationary pressures.”

However, despite this gentle tone about inflation as their biggest concern, the minutes also pointed to an important dimension of the Fed’s discussion in the coming months – when to slow the pace of interest rate increases, and how to tell if rate hikes may be triggered. passed. Point needed to beat the high price.

While traders who raised their bets were generally considered “pessimistic” that the Fed would agree to only a half-percentage point increase at the September meeting, Bob Miller, President of Fixed Income for America at BlackRock, said the minutes appeared to give the Fed room. Greater to respond with data flow.

He said the “intended message was much more accurate” and reflected the need for “discretionary” by a central bank trying to assess conflicting economic data and shocks. “Putting some conditions in the future seems to make sense given the unprecedented nature of this particular cycle.”

The pace of price increases could ease as soon as next month, with the minutes stating that, given time is needed to assess how tight policy will affect the economy, “it will become appropriate at some point” to move from the larger economy, with increases of 75 basis points approved. On them at the Federal Reserve Board meetings in June and July, to half a percentage point and eventually increase a quarter of a percentage point.

But it seems that the final level of interest rates still plays a big role.

“Some” of the participants said they felt rates had to reach a “restrictive enough level” and stay there “for some time” in order to control inflation, which proved to be more stable than expected.

On the other hand, “many” pointed to the risk that the Fed “could tighten the policy stance too much to restore price stability,” particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to the Fed’s rate hike, “participants generally felt that the bulk of the effects on real activity were not yet felt,” the minutes said.

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 labor market remained strong and unemployment was at a near-record level.

Incoming data

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

For the Fed to limit its rate increases, inflation reports due before the next meeting will likely need confirmation that the pace of rate increases is declining. Inflation at the Fed’s preferred metric is more than three times the central bank’s 2% target.

Data since the Fed’s policy meeting in July has shown that annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that should signal an interest rate increase of 50 basis points next month.

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

Core retail sales in the US, which closely aligns with the consumer spending component of GDP, were stronger than expected in July. This data, along with the shock value headline that inflation has crossed the 10% mark in the UK, seemed to prompt investors in futures contracts linked to the Fed’s policy target rate to shift bets in favor of the 75 basis point rate. Raise next month. Read more

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

Job and wage growth in July exceeded expectations, and the stock market’s recent rally may show that the economy is still too “hot” for the Fed to rest. Read more

(Howard Schneider reports). Edited by Paul Simao

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