Federal Reserve officials discussed the need to keep interest rates at levels that constrain the US economy “for some time” to stem the highest inflation in about 40 years, according to a report from their last meeting.
Minutes from the meeting, which saw the US Federal Reserve raise interest rates by 0.75 percentage points for the second straight month, signaled that policymakers were determined to press ahead with monetary tightening but were aware of the risks of overshooting.
Given the magnitude of the inflation problem and the “upside risks” to the outlook for inflation, officials backed raising interest rates to the point where they stifled economic growth.
Raising interest rates to such levels would allow the Fed to raise them even “further to appropriately restrictive levels if inflation turns out to be higher than expected,” the minutes say.
Some officials signaled that once interest rates have been raised enough to cool the economy “sufficiently,” it is likely “appropriate to maintain those levels to ensure inflation is firmly on track” back toward the Fed’s April 2 target Percent is cents.
Officials stressed that, according to the minutes, “most” of the impact of rate hikes has not yet been materially felt, and price pressures have shown little sign of improvement. That should mean that inflation will remain “uncomfortably high for some time” but also that the Fed could change course in the next phase of its rate-hiking cycle.
“The history of lags was the history of minutes,” said Andy Schneider, US economist at BNP Paribas. “The result is that they will assess more and be more cautious going forward.”
After raising interest rates in July, the Fed is in its most aggressive cycle of monetary tightening since 1981. The rate hike came just a day before data showed the US economy contracted for a second straight quarter, a usual sign of a recession.
In just four months, it raised its key interest rate from almost zero to a target range of 2.25 to 2.5 percent.
At this level, the federal funds rate is in line with most officials’ estimates of a “neutral” policy stance for 2 percent inflation, meaning it will neither boost nor slow economic activity.
Senior officials are actively debating whether a third consecutive 0.75 percentage point rate hike is needed at the next monetary policy meeting in September, or whether the Fed can start making smaller rate hikes at future meetings.
The minutes reiterated the point made by Fed Chair Jay Powell at the press conference following the July announcement, when he said that as the central bank continued to tighten monetary policy, “it will likely be appropriate to slow down the pace of hikes.” slow it down”.
Financial markets heeded the comment at the time – although Powell did not rule out “another unusually large rally” in September – and US stocks and other risky assets rallied strongly.
The market rally has gained momentum in recent weeks, easing financial conditions for consumers and businesses and counteracting some of the impact of the Fed’s tightening.
After the minutes were released on Wednesday, Treasury yields fell and stocks rose as investors interpreted the minutes as dovish. The expectation of where the Fed’s key interest rate would be at the end of the year fell slightly from 3.6 percent to around 3.5 percent.
Some members of the Federal Open Market Committee and other Fed Chairmen have dismissed the notion that the central bank will rein in its aggressive stance, instead emphasizing its commitment to pushing rates well into the hawkish zone. But the protocol’s emphasis on the risks of overly aggressive tightening countered that rhetoric.
The differing tone of the minutes also suggested a “lack of commitment to restoring price stability,” said Tim Duy, chief US economist at SGH Macro Advisors. “This increases the risk that they will not complete the fight for price stability.”
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However, the minutes suggest that Fed officials are increasingly of the view that if the central bank is to stamp out inflation with a “moderate” rise in unemployment from the current 3.5 percent, there may be job losses and an economic downturn. which is historically low.
In an interview with the Financial Times last week, San Francisco Fed President Mary Daly said the central bank is “far from finished” in its fight against inflation. She added that there must be clear evidence that consumer price growth is slowing significantly before considering a slackening of the rate-hiking cycle.
According to the latest inflation data, there was no increase in consumer prices between June and July and a slower annual rate of 8.5 percent. This was followed by a surprisingly strong payrolls report last week that showed the US economy added 528k jobs in July.
Daly said she is inclined to support a half-point rate hike next month but is “open-minded” to another 0.75 percentage point hike.
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