Federal Reserve officials discussed the need to keep interest rates at levels that constrain the U.S. economy “for some time” to try to contain the highest inflation in roughly 40 years, according to an account of their most recent meeting.
Minutes from the July meeting, when the U.S. central bank raised its benchmark interest rate by 0.75 percentage points for the second consecutive month, indicated that policymakers were determined to continue tightening monetary policy, but aware of the risks of overdoing it.
Given the enormity of the inflation problem and the “upside risks” to the outlook for price growth, officials supported raising interest rates to the point that they act as a brake on to economic growth.
Raising rates to that level would allow the Fed to raise them even “further, to appropriately restrictive levels, if inflation were to be higher than expected,” the minutes said.
Some officials indicated that once rates had been raised to the point where they cooled the economy “sufficiently,” it would probably “be appropriate to maintain that level to ensure that inflation is firmly on the way back.” to the Fed’s 2 target. per cent.
Officials stressed that the “thickness” of the effect of the rate hikes had not yet been significantly felt, according to the minutes, with price pressures showing little sign of improvement. That likely means inflation will remain “uncomfortably high for some time,” but also that the Fed may change course in the next phase of its rate-hike cycle.
“The story of the delays was the story of the minutes,” said Andy Schneider, US economist at BNP Paribas. “The result is that they will evaluate more and be more cautious as they do so.”
After July’s rate hike, the Fed is in its most aggressive monetary tightening cycle since 1981. The rate hike was implemented just a day before data showed the US economy it contracted for the second quarter in a row, a common indicator of a recession.
In just four months, it has raised its benchmark benchmark rate from near zero to a target range of 2.25% to 2.5%.
At this level, the federal funds rate is in line with most officials’ estimates of a “neutral” policy environment when inflation is at 2%, meaning it neither stimulates nor dampens economic activity .
Senior officials are actively debating whether a third consecutive 0.75 percentage point rate hike is needed at the next policy meeting in September or whether the Fed can start implementing smaller increases.
The minutes echoed the point made by Fed Chairman Jay Powell at the news conference following the announcement in July, when he said that as the central bank continues to tighten monetary policy, “it is likely it will be appropriate to slow down the pace of increases.”
Financial markets seized on the comment at the time, although Powell did not rule out “another unusually large increase” in September, and US stocks and other risk assets rallied sharply.
The market rally has picked up steam in recent weeks, easing financial conditions for consumers and businesses and offsetting some of the effects of Fed tightening.
After the minutes were released on Wednesday, Treasury yields fell and stocks rose as investors interpreted policymakers’ comments as moderating. Expectations for where the Fed’s benchmark interest rate will be at the end of the year fell slightly from 3.6% to about 3.5%.
Some members of the Federal Open Market Committee and other Fed chairmen have rejected the idea that the central bank will rein in its aggressive approach, instead emphasizing its commitment to push rates well into restrictive territory. But the emphasis in the minutes on the risks posed by too aggressive tightening countered this rhetoric.
The mixed tone also suggested a “lack of commitment to restore price stability,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. “It raises the risk that they don’t see the struggle for price stability at the bottom.”
Still, the minutes suggested Fed officials were increasingly of the view that job losses and an economic downturn may be needed to curb inflation, with unemployment rising “moderately” since current historically low level of 3.5 percent.
In an interview with the Financial Times last week, San Francisco Fed President Mary Daly said the central bank was “not done yet” in its fight against inflation. He added that he would need to see clear evidence that consumer price growth was slowing substantially before considering any slowdown in the rate hike cycle.
According to the latest inflation data, between June and July there was no increase in consumer price growth and a slower annual rate of 8.5 percent. That followed a surprisingly strong jobs report the previous week, which showed the US economy added 528,000 positions in July.
Daly said she was inclined to support a half-point rate increase next month, but was “open-minded” about another 0.75 percentage point adjustment.