Fed minutes show more rate hikes in pipeline, but pace likely to slow

The Federal Reserve Board building on Constitution Avenue in Washington, U.S., on March 27, 2019, in this photo. REUTERS/Brendan McDermid/File Photo

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WASHINGTON, Aug 17 (Reuters) – Federal Reserve officials late last month saw “little evidence” that U.S. inflationary pressures are easing. July 26-27 policy meeting.

While not explicitly specifying a specific pace of rate hikes to come, starting at the September 20-21 meeting, the minutes released Wednesday showed U.S. central bank policymakers are committed to raising rates as much as necessary to control inflation — even if they start. More openly acknowledge the risk of them going too far and over-restricting economic activity.

“Participants agreed that there is little evidence to date that inflationary pressures are easing,” the minutes said.

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While some reduction in inflation, which has been running at a four-decade high, could come from improvements in global supply chains or a fall in fuel and other commodity prices, the burden would be lifted by imposing higher borrowing costs. Businesses and households will spend less, the minutes say.

“Participants emphasized that a reduction in aggregate demand would play a key role in easing inflationary pressures,” the minutes said.

However, while the underlying tone of inflation was their main concern, the minutes flagged what will be a key dimension of the central bank’s debate in the coming months — when to slow the pace of rate hikes and how to know when rate hikes have passed the point needed to beat inflation.

Although generally judged “davish” by traders who increased their bets, the Fed will approve a half-percentage-point hike at its September meeting, Bob Miller, head of U.S. basic fixed income at BlackRock, seems to be giving minutes. Feed more opportunity to react when data comes in.

He said the “proposed message is more nuanced” and reflects the need for a central bank’s “discretion” to assess conflicting economic data and shocks. “Given the unprecedented nature of this particular cycle, it seems prudent to lay out some conditions going forward.”

The pace of a rate hike next month could actually ease, with the minutes saying that a move away from larger rates “would be appropriate at some point” as time is needed to assess how tight policy affects the economy. The 75-basis-point hikes were approved at the central bank’s June and July meetings, with half-a-percentage-point and eventually quarter-percentage-point hikes.

But the final level of interest rates still seemed to be in play.

“Some” participants said they felt that rates should reach a “sufficient level of control” and that there should be “some time” to control inflation, which would be more persistent than expected.

“Many,” on the other hand, noted the risk that the central bank could “tighten the stance of policy beyond what is necessary to restore price stability,” particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to rate increases already telegraphed by the Fed, “participants generally determined that they had not yet felt the bulk of the effects on actual activity,” the minutes said.

As of the July meeting, Fed officials noted that while some parts of the economy, particularly housing, had started to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment remained at record lows.

incoming data

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

In order for the central bank to scale back its rate hikes, inflation reports released before its next meeting should confirm that the pace of price rises is slowing. Inflation, the central bank’s preferred measure, has been three times the central bank’s 2% target.

Annual consumer inflation eased to 8.5% in the month from 9.1% in June, according to data from the central bank’s July policy meeting, which would argue for a smaller 50-basis-point rate hike next month.

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

Core U.S. retail sales, which are most closely related to the consumer spending component of GDP, were stronger than expected in July. That data, along with the shock-value headline that inflation in the United Kingdom passed 10%, prompted futures investors tied to the Fed’s target policy interest rate to shift bets in favor of a 75-basis-point rate. Next month’s hike. read more

Meanwhile, the Chicago Fed index of credit, foreign exchange and risk gauges showed continued easing. This poses a dilemma for policymakers who feel that tighter fiscal conditions are needed to control inflation.

Job and wage growth beat expectations in July, and the recent stock market rally may point to an economy that is still “warm” for the Fed’s comfort. read more

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Report by Howard Schneider; Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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