Fed officials anticipate 'significant' interest rate hikes until inflation eases, minutes show

Federal Reserve officials indicated at their July meeting that additional interest rate hikes are necessary in coming months until policymakers see evidence that inflation has cooled "considerably."

Minutes from the U.S. central bank's July 26-27 meeting released on Wednesday showed that policymakers remain committed to raising interest rates as high as necessary in order to bring consumer prices closer to their 2% goal – even if it that means slower economic growth and less consumer spending. 

"With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability," the minutes said.

Policymakers noted that the current benchmark federal funds range of 2.25% to 2.50% is around the "neutral" level, meaning that it neither supports nor restricts economy activity. But some officials said a restrictive stance will likely be necessary in order to prevent inflation from becoming entrenched in the economy, which could further weigh on businesses.

JULY INFLATION BREAKDOWN: WHERE ARE RISING PRICES HITTING AMERICANS THE HARDEST?

As of the July meeting, Fed officials noted that while the housing market has started to slow down as the result of rising borrowing costs, the broader economy remains relatively healthy. But they also noted that inflation has been largely resistant so far to steeper interest rates.

"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said. "They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and could remain uncomfortably high for some time."

While the rapid pace of price increases eased slightly in July with the monthly increase flat at 0%, the consumer price index still climbed 8.5% from the previous year – hovering near a painful, four-decade high, the Labor Department reported last week. Markets rallied on the lighter-than-expected report, with investors hoping the Fed could take its foot off the gas in coming months. 

INFLATION IS STILL WIPING OUT THE AVERAGE AMERICANS' WAGE GAINS

But policymakers expressed concern in July that inflation could become entrenched if consumers think the Fed is wavering. 

"Participants judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently," the minutes said. "If this risk materialized, it would complicate the task of returning inflation to 2 percent and could raise substantially the economic costs of doing so."

Officials approved two back-to-back 75 basis point interest rate hikes in June and July – triple the usual size – and hinted that another increase of that magnitude is on the table in September, depending on the economic data. The minutes show that officials expect to approve a smaller 50 point increase in September, although they acknowledged the pace depends on the data.

Stronger-than-expected data, including solid retail sales reported on Wednesday morning and a blowout July jobs report, could make the case for another mega-sized rate hike next month. 

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"The Fed minutes once again show that controlling inflation is its top priority," said Chris Larkin, managing director of trading at E*Trade. "While it may not be as dovish as some investors hoped to see, there are indications that a slowdown in hikes is in the not-so-distant future."