Fed minutes show more rate hikes coming, 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, prompting themselves to slow the economy as much as needed to contain inflation. Minutes of their July 26-27 policy meeting.

Although the Fed did not explicitly specify a specific pace of rate hikes to come, starting at the September 20-21 meeting, the minutes released on Wednesday showed a commitment to raising rates as much as necessary to bring inflation under control. It should generate less spending and reduce overall growth.

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.

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However, on the most important gauge, central bank officials posted little improvement, at least as of the end of July.

“Participants agreed that there is little evidence to date that inflationary pressures are easing,” the minutes said. While some of the inflation reduction may come from improving global supply chains or falling fuel and other commodity prices, some of the heavy lifting will have to come from imposing higher borrowing costs on households and businesses.

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

The pace of future hikes will depend on incoming economic data and central bank assessments of how the economy is adjusting to the higher rates already approved.

Some participants said rates would need to reach a “sufficient level of control” and stay there “for a while” to contain inflation running at a four-decade high.

In a glimpse of the growing debate at the central bank, “many” participants also noted the risk that the central bank “could tighten the stance of policy beyond what is necessary to restore price stability,” making it sensitive to incoming data. Very important. [nL1N2ZS1FQ]

After the release of the minutes, futures traders pegged to the Fed’s policy rate saw a half-percentage-point rate hike in September, with Fed funds futures prices reflecting a 40% chance of a 75-basis-point increase. .

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.

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.

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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’s 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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