Fed officials see ongoing inflation risks that could require more rate hikes, minutes show
Fed officials warned of 'upside risks' to inflation at July meeting
Arbor Financial President Jeffrey Small argues recent economic data suggests the Fed will decrease rates in the second quarter next year on 'Varney & Co.'
Most Federal Reserve officials signaled during their July policy-setting meeting that high inflation still poses an ongoing threat that could necessitate additional interest rate hikes this year.
Minutes from the U.S. central bank's July 25-26 meeting released Wednesday showed that central bank officials observed that inflation remains well above the Fed's 2% target — and that policymakers need to see "further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating."
"With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy," the minutes said.
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Federal Reserve Chair Jerome Powell attends a news conference following a Federal Open Market Committee meeting in Washington, D.C., on Sept. 21, 2022. (Chen Mengtong/China News Service via Getty Images / Getty Images)
Officials voted at the meeting to raise interest rates by a quarter-percentage point, putting the federal funds rate at a 22-year high of 5.25% to 5.5%. It marked the 11th rate hike in the span of 16 months. Although many economists expected it could be the final rate hike in a cycle that began during March 2022, policymakers left the door open to additional increases this year, despite a recent pullback in inflation.
"We intend again to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target, and we’re prepared to further tighten if that is appropriate," Chairman Jerome Powell told reporters after the meeting.
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In the weeks since then, some Fed officials have indicated they believe that further tightening may not be warranted. But the minutes suggest they may be in the minority.
The Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., on Sept. 19, 2022. (Kevin Dietsch/Getty Images / Getty Images)
"In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time," the minutes said.
Although investors widely expect officials to hold rates steady at their next meeting in September, the odds for a rate hike in November jumped after the release of the meeting minutes. The probability that the Fed delivers another rate hike that month rose to 37% on Wednesday, according to the CME Group's FedWatch tool, which tracks trading. That compares to about 11% of traders who expect the Fed to hold rates steady at the current range of 5% to 5.25%.
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Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
Fed officials have lauded the surprising resiliency of the economy in the face of higher interest rates. In fact, the central bank's own staff economists retracted a previous assessment that a mild recession is likely to begin later this year. However, they are still projecting below-trend GDP growth in 2024 and 2025 that would lead to a "small increase in the unemployment rate relative to the current level."