Federal Reserve officials saw “little evidence” late last month that US inflation pressures were easing, and steeled themselves to force the economy to slow down as much as needed to control the surge in prices, according to the minutes of their July 26-27 policy meeting.
While not explicitly hinting at a particular pace of coming rate increases, beginning with the Sept. 20-21 meeting, the minutes released on Wednesday showed policymakers committed to raising rates as high as necessary to bring inflation under control, and acknowledging that they would have to engineer less spending and lower overall growth for that to happen.
As of the July meeting, Fed officials noted that while some parts of the economy, notably housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.
On the metric that mattered most, however, Fed officials at least as of late July had registered little progress.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said. Though some inflation reduction might come through improving global supply chains or drops in the prices of fuel and other commodities, some of the heavy lifting would also have to come by imposing higher borrowing costs on households and businesses.
“Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures,” the minutes said.
The pace of future hikes would depend, the minutes said, on incoming economic data, as well as Fed assessments of how the economy was adapting to the higher rates already approved.
Some participants said they felt rates would have to reach a “sufficiently restrictive level” and remain there for “some time” in order to control inflation, which is running at a four-decade high.
In a glimpse of the emerging debate at the central bank, “many” participants also noted a risk that the Fed “could tighten the stance of policy by more than necessary to restore price stability,” a fact that they said made sensitivity to incoming data all the more important.
After the release of the minutes, traders of futures tied to the Fed’s policy rate saw a half-percentage-point rate hike as more likely in September, with fed funds futures prices reflecting just a 40% chance of a 75-basis-point increase.
Incoming data
The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.