Federal Reserve officials indicated at their July 26-27 meeting that they likely would not consider backing off interest rate hikes until inflation dropped significantly. They saw “little evidence” that inflation pressures in the US are easing, according to the minutes released on Wednesday.
During the July meeting in which the Federal Open Market Committee (FOMC) agreed to raise the interest rate by 75 basis points, policymakers expressed their intention to bring down inflation well above the desired level of 2 percent. But they did not give specific guidelines for future increases and said they would monitor the data closely before making any decision.
Market estimates are that there will be a 50-basis point rate hike at the September meeting.
The meeting participants noted that the range of 2.25 percent-2.50 percent for the federal funds rate was around the “neutral” level that neither supports nor restrains activity. Some officials said a restrictive stance would likely be appropriate, indicating further rate hikes in the future.
“With inflation remaining well above the committee’s target, participants considered that a transition to a restrictive policy stance was required to fulfill the committee’s legislative mission to promote maximum employment and price stability,” the minutes said.
The document also reflected the idea that once the Fed is comfortable with its policy stance and sees it as having an effect on inflation, it may begin to “take its foot off” the policy brakes, i.e. loosening its hawkish policy.
“Participants considered that as the monetary policy stance tightens further, it would likely become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes said.
However, the summary also stated that some respondents said: “it is likely to be appropriate to maintain this level for some time to ensure that inflation is steadily on track to return to 2 percent.”
Officials indicated that future price decisions will be based on incoming data. But they also said there was scant evidence that inflation was waning. The minutes stressed repeatedly the determination of the Federal Reserve to reduce inflation, and that the participants “confirmed that a slowdown in the overall demand will play an important role in reducing inflation pressures.”
They further noted that it will likely “take some time” before the policy begins enough to have a measurable impact.
Policymakers were concerned that any signs of volatility from the FED would make the situation worse.
The minutes said: “Participants considered that the significant risk facing the committee was that high inflation could take hold if the public began to question the committee’s determination to adequately adjust its policy stance..If this risk materializes, it would complicate the task of bringing inflation back to 2 percent and could significantly raise the economic costs of doing so.
The minutes indicated that some members were concerned that the FED might hike rates too far, underlining the importance of not being constrained by forwarding guidance on moves and instead following the data.
Although the FED has taken the unprecedented steps of raising three-quarters of a point in back-to-back meetings, markets have been rallying lately in the hope that the central bank may ease the pace of increases as fall approaches.
Markets
Following the release of the Federal Reserve’s minutes, US stocks closed lower after major indices fluctuated when investors thought the minutes suggested monetary policymakers might be less hawkish than previously thought when they raise interest rates in September.
The indices trimmed their losses after the minutes of the meeting were published, and “Dow Jones” turned to the upside for a brief period. But it soon returned to losses.
