Fed minutes show more rate hikes coming, but pace could slow

The Federal Reserve Building on Constitution Avenue is pictured in Washington, U.S., 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 United States were easing and worked to force the economy to slow as much necessary to control soaring prices, according to the minutes of their July 26-27 political meeting.

Without explicitly hinting at a particular pace of rate hikes ahead, starting with the September 20-21 meeting, minutes released Wednesday showed policymakers committed to raising rates as high as needed. to bring inflation under control, and recognizing that they would have to engineer less spending and lower overall growth for that to happen.

At the July meeting, Fed officials noted that while parts of the economy, notably housing, had begun to slow under the weight of tightening credit conditions, the labor market remained strong and unemployment was at near record highs.

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On the metric that mattered most, however, Fed officials, at least by late July, had made little progress.

“Participants agreed that there was little evidence to date that inflationary pressures were easing,” the minutes read. While some of the reduction in inflation may come from improving global supply chains or lower prices for fuel and other commodities, some of the heavy lifting is also expected to come from imposition of higher borrowing costs on households and businesses.

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

The pace of future hikes will depend, according to the minutes, on incoming economic data, as well as Fed assessments of how the economy adjusts to the higher rates already approved.

Some participants said they believe rates should reach a “sufficiently restrictive level” and remain there “for some time” in order to control inflation, which is at its highest level in four decades.

In an overview of the emerging debate at the central bank, “many” participants also noted a risk that the Fed “could tighten the policy stance more than necessary to restore price stability”, a fact which they said, makes sensitivity to incoming data all the more important. [nL1N2ZS1FQ]

After the minutes were released, traders in Fed policy rate futures said a half-percentage-point rate hike was more likely in September, as fed funds futures prices reflecting only a 40% chance of a 75 basis point increase. .

ENTRY DATA

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

For the Fed to scale back its rate hikes, the inflation reports due out before the next meeting would likely confirm that the pace of price increases is slowing.

Data since the Fed’s monetary policy meeting in July showed that annual consumer inflation fell this month to 8.5% from 9.1% in June, a fact that would argue for a further increase. low rates of 50 basis points next month.

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

Core retail sales in the United States, which best matches the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock stock headline that inflation had breached the single digit mark in the UK, seemed to prompt investors in futures tied to the Fed’s key interest rate target to change bets. in favor of a rate of 75 basis points. hiking next month. Read more

Meanwhile, a Chicago Fed Credit, Leverage and Risk Index 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 an economy still too “hot” for the Fed’s comfort. Read more

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Reporting by Howard Schneider; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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