WASHINGTON — Federal Reserve officials were divided on the need for further interest rate hikes at the July 25-26 U.S. central bank meeting, with “some attendees” citing risks to the economy pushing rates too far even as “most” policymakers continued to prioritize fighting inflation, according to the minutes of the session released Wednesday.
“Participants remained steadfast in their commitment to return inflation to the target of … 2%,” read the minutes of a meeting in which policymakers from the Federal Open Market Committee unanimously agreed raise the benchmark overnight interest rate to 5.25%-5.5%. range. “Most participants continued to see significant upside risks to inflation, which may require further tightening of monetary policy.”
Still, cautious voices regarding the effects of continued monetary tightening seemed to play a bigger role in the debate at last month’s meeting, an indication that the spread of sentiment at the Fed has widened as policymakers assess the evidence that inflation is falling and judge the potential damage. jobs and economic growth if rates are raised more than necessary.
A “couple” of participants, for example, advocated leaving rates unchanged in July.
The group also “discussed several risk management considerations that could influence future policy decisions,” the minutes said. Although a majority maintained inflation as the overriding risk, “some participants noted that while economic activity had been resilient and the labor market had remained strong, there continued to be risks ahead. downside risks to economic activity and upside risks to the unemployment rate”.
“These included the possibility that the macroeconomic effects of the tightening of financial conditions since the start of last year could turn out to be more substantial than expected.”
In general, according to the minutes, Fed policymakers agreed that the level of uncertainty remained high and that future interest rate decisions would depend on the “totality” of data arriving in the “months to coming” to “help clarify the extent to which the process of disinflation was continuing” – a possible indication of a more patient approach to any further rise in borrowing costs.
US Treasury yields hit session highs after the minutes were released while US stocks extended losses. The dollar was trading higher against a basket of currencies.
“Provisional Signs”
The July meeting came ahead of the release of data that showed major price metrics have fallen this summer alongside declining job creation.
But Fed staff analysis and policymakers’ views showed a potential “soft landing” was looming, with continued job gains and economic growth and some confidence in a continued decline. inflation.
While participants “stressed” the need for continued progress to ensure that inflation returns to the Fed’s 2% target, they also “cited a number of tentative signs that inflationary pressures may subside,” from slowing housing inflation to falling inflation measures. expectations in recent surveys.
Fed staff, who present their own independently developed views on the economy to policymakers, dropped their projection of a recession later this year, but continue to see inflation decline through the end of this year and then in a gradual return to the central bank’s target.
Inflation, as measured by the personal consumption expenditure price index, the Fed’s preferred gauge, peaked at an annual rate of 6.9% in June 2022 but had fallen to 3% in June this year.
Fed staff said they expect underlying prices to “fall” in the second half of this year.
Investors in contracts linked to the federal funds rate are strongly betting that the Fed will not raise its key rate again during the current tightening cycle. They put nearly a 90% chance on the prospect of the central bank leaving rates unchanged at its September 19-20 meeting, largely unchanged from before the minutes were released.
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