Federal Reserve officials welcomed the recent slowdown in inflation at their July meeting, Minutes issued On Wednesday they showed, but they stopped short of declaring victory. Instead, the officials stressed that inflation remained “unacceptably” high and that “most” saw continued risks of rising inflation that could prompt the central bank to raise interest rates further.
Federal Reserve policymakers raised interest rates to a range of 5.25 to 5.5 percent on July 26, the highest level since 2001. Officials have raised borrowing costs sharply over the past 17 months — first adjusting them quickly, and recently at a slower pace — to slow the economy. . By making it more expensive to borrow and spend, they hoped to calm demand and fight inflation.
But given how much interest rates have risen in recent months and how low inflation has been recently, investors have wondered whether policymakers are likely to raise borrowing costs again. The inflation rate eased to 3.2 percent in July on an overall basis, down sharply from its highest level more than 9 percent In the middle of 2022.
Officials at the Fed meeting welcomed the recent progress in slowing rate hikes, but many stopped short of suggesting that it might prompt them to back down from their campaign to cool the economy. The minutes showed that “two” Fed policymakers did not want to raise interest rates in July, but most supported the move – and indicated that there was still more adjustment to come.
The minutes showed that “participants noted the recent decline in headline and core inflation rates,” but stressed that “inflation remained unacceptably high and more evidence is needed for them to be confident that inflation is clearly on the path back to normal.”
The minutes added that with inflation still extraordinarily high and the labor market strong, “most participants continued to see significant upside risks to inflation, which may require further tightening of monetary policy.”
However, Fed officials acknowledged that they would need to factor in the potential costs to the economy. Higher interest rates can sharply slow hiring, in part by making it more expensive for businesses to obtain business loans, which can lead to higher unemployment and even tip the economy into recession.
A “number” of policymakers noted that “it was important that the committee’s decisions weigh the risks of unintended excessive policy tightening against the cost of insufficient tightening”.
Pulling back immediately after the minutes were released, stock prices initially rebounded, but eventually closed down 0.8 percent for the day. The two-year Treasury yield, which is affected by changes in interest rate expectations, rose and has continued to rise since the morning.
“The limited new information contained in the release failed to trigger a dramatic price reaction,” analysts at BMO Capital Markets wrote in a note to clients after the release. “There was nothing to impede our assumption that September would be another ‘jump,’ although another November or December hike is on the table.”
Fed officials face a complex economic picture as they try to assess whether they have adjusted policy enough to bring inflation back to 2% over time. On the one hand, the labor market is showing signs of cooling off and the Fed’s price action is already slowly trickling in to constrain the economy. Yet consumer spending remains surprisingly strong, unemployment is very low, and wage growth is strong — momentum that could give companies the cash to charge their customers more.
Officials noted that there is a “high degree of uncertainty” about the extent to which moves they have already taken to ease demand will continue. Financial conditions are tight, which means borrowing is difficult and expensive, which officials believe could affect consumption. At the same time, the housing market appears to be stabilizing, and some officials have suggested that “the housing sector’s response to monetary policy adjustment may have peaked.”
The resilience of the economy has prompted the Federal Reserve’s economists – a group of influential analysts whose forecasts inform policymakers – to reconsider their earlier predictions that the economy would fall into a mild recession late this year.
“Indicators of real spending and activity came out stronger than expected; as a result, employees no longer see that the economy will enter a mild recession by the end of the year.” But they still expect “a slight increase in the unemployment rate relative to its current level” in 2024 and 2025.
It’s hard to guess how quickly inflation will slow down in the future, because there are so many moving parts. For example, cheaper gas was helping to dampen price increases – but gas costs began to recover in the second half of July, a trend that continued into August.
At the same time, rental costs continue to slide in official inflation data, which should help smooth out the headline numbers. And China is growing more slowly than many economists expected, which could help influence global commodity prices and slow US inflation around the edges.
The minutes showed that “the participants indicated a number of initial signs indicating that inflationary pressures may recede.” Those included small increases in commodity prices, slowing online price gains, and “evidence that companies were raising prices by smaller amounts than previously,” among others.
Fed officials have also trimmed their balance sheet of bond holdings, a process that could remove some power from asset prices but will leave the central bank with a smaller footprint in financial markets. The officials suggested in the minutes that the sifting process could continue even after interest rates begin to fall, something they expected to begin next year—illustrating their continued commitment to downsizing their holdings.
“A number of participants noted that the balance sheet runoff should not end when the committee finally begins lowering the target range for the federal funds rate,” the minutes said.
Joe Rennison Contribute to the preparation of reports.