Fed minutes show more rate hikes to come, but pace may slow

The Federal Reserve Board building on Constitution Avenue is pictured in Washington, US, 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 US were easing, stealing themselves to force the economy to slow down as much as it took to contain the price hike. management, according to the minutes of their July 26-27 policy meeting.

While not explicitly hinting at a particular pace of interest rate hikes to come, starting with the September 20-21 meeting, minutes released Wednesday showed policymakers committed to making rates as high as necessary to keep inflation below. control, recognizing that they would have to ensure that spending cuts and overall growth is lowered.

At the July meeting, Fed officials noted that while some parts of the economy, especially the housing market, began to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at near-historic lows.

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On the most important metric, however, Fed officials had made little progress, at least as of late July.

“Participants agreed that there was little evidence to date that inflationary pressures were abating,” the minutes said. While some reduction in inflation could come from improving global supply chains or falling prices of fuel and other commodities, some of the heavy lifting should also come from imposing higher borrowing costs on households and businesses.

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

The pace of future hikes, the minutes said, would depend on incoming economic data, as well as the Fed’s assessments of how the economy adjusted to the higher rates that had already been approved.

Some participants said they believed tariffs should reach “sufficiently restrictive levels” and remain there for “some time” to contain inflation, which is at a four-decade high.

Glimpsing the emerging debate at the central bank, “many” participants also noted a risk that the Fed could “tighten policy stance more than is necessary to restore price stability,” a fact they said made sensitive to incoming data all the more important. [nL1N2ZS1FQ]

Following the release of the minutes, traders in futures pegged to the Fed’s key rate saw a half-percentage point rate hike as more likely in September, with fed funds futures prices reflecting only a 40% chance of a 75 basis point increase.


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

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 has slowed.

Data since the Fed’s July policy meeting showed that annual consumer inflation declined to 8.5% that month, from 9.1% in June, a fact that would argue in favor of the smaller rate hike of 50 basis points next month.

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

Core sales in the US, which most closely match consumer spending by gross domestic product, were stronger than expected in July. That data, along with the shocking headline that UK inflation had crossed the 10% mark, seemed to prompt investors in futures pegged to the Fed’s key rate to shift bets in favor of an interest rate of more than 10%. 75 basis points. walk next month. read more

Meanwhile, a Chicago Fed index of credit, leverage and risk measures 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 that an economy is still too “hot” for the comfort of the Fed. 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, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economic reporter, and on the Washington Post local staff.

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