A Divided Stance on Interest Rate Hikes
Federal Reserve officials were split at the U.S. central bank's July 25-26 meeting on the need for more interest rate increases. While "most" policymakers prioritized the fight against inflation, "some participants" highlighted the risks of pushing rates too high, potentially damaging the economy, according to the released minutes.
Inflation Concerns Remain Central
The minutes underscored an unwavering commitment among participants to reduce inflation to the 2% target. With unanimous agreement, the Federal Open Market Committee decided to raise the benchmark overnight interest rate to between 5.25% and 5.50%. Concerns about significant upside risks to inflation dominated the discussion.
Voices of Caution Amid Monetary Tightening
The debate saw cautionary voices playing a more significant role, signaling a broader spread of opinions among Fed officials. As policymakers assess the falling inflation and the potential adverse effects on jobs and growth, a "couple" of participants even advocated for leaving the rates unchanged in July.
Risk Management and Economic Activity
Fed officials "discussed several risk-management considerations" for future policy decisions. While the majority saw inflation as the primary risk, there were concerns about possible downside risks to economic activity and upside risks to unemployment due to the financial tightening since last year.
Uncertainty Looms Over Future Decisions
The minutes highlighted that uncertainty remained high among policymakers. Future interest rate decisions would be guided by a totality of data, pointing to a possibly more patient approach to any further increases in borrowing costs.
Market Reaction to the Minutes
Following the release of the minutes, U.S. Treasury yields hit session highs, U.S. stocks extended losses, and the dollar traded higher against a basket of currencies.
Tentative Signs of a Soft Landing
The July meeting preceded data showing key price measures falling this summer along with a decrease in job creation. Both Fed staff's analysis and policymakers' views hinted at a potential "soft landing," with some signs that inflation pressures might be easing.
Fed Staff’s Projections and Inflation Trends
Fed staff dropped their recession projection for later this year but continue to forecast inflation falling through year-end. With the Fed's preferred gauge showing inflation at 3% as of June, a "step-down" in underlying prices is expected in the latter half of the year.
Investors' Expectations for Interest Rates
Investors are heavily betting that the Fed won't raise its policy rate again during the current tightening cycle. Nearly a 90% chance is being placed on the prospect that the central bank will leave rates unchanged at its September 19-20 meeting.
