Fed Considers Softer Rate Hikes To Assess The Blow To The Economy

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Federal Reserve officials judged in July that it would eventually be appropriate to slow the rate of interest rate hikes as they assess the effects of their tightening actions to date.

“As the monetary policy stance tightens further, it would probably be appropriate at some point to slow the pace of interest rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” according to the minutes of the Federal Open Market Committee. July 26-27 meeting posted Wednesday in Washington.

“Many participants commented that, given the constantly changing nature of the economic environment and the existence of long and variable lags in the effect of monetary policy on the economy, there was also a risk that the committee could harden the position of the policy more than necessary to restore price stability,” the minutes showed.

Fed members raised their benchmark interest rate by 75 basis points at that meeting for the second straight month, marking the fastest pace of tightening since the early 1980s in a battle against white-hot inflation.

Still, the S&P 500 index of US stocks is up about 9% since the July meeting. Fed officials will have the opportunity to offer new insights on the outlook during their August 25-27 retreat in Jackson Hole, Wyoming.

The language used in the minutes echoed what Powell said at the post-meeting press conference in July. His comments ignited the move higher in equities when he suggested the central bank could transition to smaller rate hikes in the future. Still, he left the door open for another “unusually large” hike at the next meeting in September, depending on what economic data is released in the interim.

A Labor Department report released on August 5, which showed companies added 528,000 employees to payrolls last month, more than double what forecasters expected, prompted investors to bet on a third consecutive increase of 75 basis points when the Fed meets on September 1. 20-21.

At the July meeting, “participants judged that a significant risk facing the committee was that elevated inflation could take hold if the public began to question the committee’s determination to sufficiently adjust the policy stance,” according to the minutes of the meeting. Federal Reserve.

But the department’s Aug. 10 reading on consumer prices showed they rose 8.5% in the 12 months through July, down from the previous month’s 9.1% rise that marked the highest rate of inflation since 1981.

Softer July inflation numbers fueled the stock market’s rally as earlier bets on a big rate hike in September were undone, with investors now assigning similar odds to a half-point or three-point hike. quarter points, according to prices. futures contracts pegged to the Fed’s benchmark rate.

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