Receive free Federal Reserve updates
We’ll send you a myFT Daily Digest email rounding up the latest Federal Reserve news every morning.
Federal Reserve officials have become more wary about the need to keep raising interest rates despite fearing the US central bank has not won its battle against inflation, according to minutes from its July meeting.
Officials unanimously backed a quarter-point increase at last month’s meeting. However, a number of policymakers were concerned that the risk of “overtightening” monetary policy versus not doing enough had become more evenly balanced or “two sided”, the minutes showed.
That reflected a new cautious tone from the Fed, signalling the central bank is nearing the end of its historic rate-rising campaign.
However, US markets sold off on Wednesday with the Nasdaq Composite and the S&P 500 closing down 1.2 per cent and 0.8 per cent, respectively.
Investors sold Treasury holdings as well, sending the 10-year yield to a 10-month high of 4.28 per cent. The two-year yield, which moves with interest rate expectations, rose 0.02 percentage points to 4.97 per cent.
Even as policymakers continued to fret about the risks of elevated inflation, the minutes showed growing unease among some officials about how much more the Fed should squeeze the economy given expectations that consumer spending will soon slow more notably, the labour market is cooling, and tighter credit conditions are beginning to bite.
A couple of participants indicated a preference to hold rates steady at the July meeting, arguing that doing so “would likely result in further progress toward the committee’s goals while allowing the committee time to further evaluate this progress”.
In a sign that officials are still on edge, however, most still saw “significant upside risks” to inflation, which they warned “could require further tightening of monetary policy”.
The minutes also noted that officials need further evidence that price pressures are subsiding in order to become more confident that inflation is “clearly on a path” back to the 2 per cent target.
Economists at Morgan Stanley said the differing opinions reflected “continued disagreement over . . . the need for further tightening” and suggested that while the July decision was unanimous it was “perhaps non-unanimous in spirit”.
July’s quarter-point increase raised the federal funds rate to a target range of 5.25-5.5 per cent, the highest level in 22 years. It followed a brief pause in June, when officials adopted a more gradual approach to tightening monetary policy following the most aggressive campaign in decades.
Economists broadly expect that last month’s rate increase will have been the final one of the year, even though the central bank’s officials in June projected the benchmark rate would peak a quarter of a percentage point higher at 5.5-5.75 per cent.
Nancy Vanden Houten, lead US economist at Oxford Economics, said the minutes made clear that further rate rises were not “preordained” and maintained her call that the Fed had already concluded its campaign to raise borrowing costs.
Fed chair Jay Powell stressed last month that the Federal Open Market Committee would digest the “totality” of the economic data ahead of the next meeting in September, but acknowledged that “given how far we’ve come, we can afford to be a little patient” when it comes to further rate rises.
Inflation remains too high for the Fed’s liking, even as price pressures have eased in recent weeks and are expected to keep receding in the coming months.
While labour market demand has further slowed, consumer spending on goods and services has remained strong despite higher borrowing costs than just over a year ago, when the Fed’s benchmark interest rate hovered near zero.
Fears that the US economy would tumble into recession have ebbed as a result, with Fed staffers scrapping their call for a mild contraction this year. Still, they expect a “noticeable slowdown in growth”, according to Powell, who has long been optimistic about the prospects for a so-called soft landing. That would translate to a small increase in the unemployment rate from its current level of 3.5 per cent, the minutes said.
Pausing rate rises again in September would give the Fed more time to take stock of how the economy is responding to earlier increases, or whether borrowing costs need to rise further to fully tame inflation.
Officials concluded that there was significant uncertainty about whether the rate rises of the past 18 months were cooling the economy sufficiently. They reiterated, however, that tighter credit conditions stemming from this year’s regional banking crisis would weigh on economic activity in the coming months.
While officials continue to debate the need for additional action, they appear more unified about keeping the benchmark rate at a level that restrains demand for an extended period. No official has suggested the Fed will cut rates again this year. According to futures markets, traders broadly expect the central bank to hold off cuts until well into 2024.
When the Fed eventually cuts its benchmark rate, the minutes indicated several officials want the central bank to keep shrinking its roughly $8tn balance sheet by ceasing to reinvest the proceeds of maturing Treasuries and agency mortgage-backed securities.
