The minutes released Wednesday from the Federal Reserve’s July meeting revealed that officials expressed concern about the pace of inflation and suggested that more rate hikes may be necessary in the future. The discussion during the meeting resulted in a quarter percentage point rate hike, which is widely expected to be the last one of this cycle. However, most members of the Federal Open Market Committee expressed worry that the fight against inflation is not yet over and that additional tightening of monetary policy may be required.
The latest rate increase brought the federal funds rate, the Fed’s key borrowing level, to a range targeted between 5.25%-5%, the highest level in over 22 years. While some members have suggested that further rate hikes may not be necessary, the minutes emphasized caution and stated that future decisions will be based on incoming data.
The minutes also reflected considerable uncertainty regarding the future direction of policy. Although there was agreement that inflation is “unacceptably high,” there were indications that inflation pressures may be abating. Almost all meeting participants were in favor of the rate increase, but those opposed suggested that the committee could skip a hike and observe the impact of previous increases on economic conditions.
There was concern over problems with commercial real estate, specifically the risks associated with a potential sharp decline in CRE valuations that could adversely affect banks and other financial institutions heavily exposed to CRE. Members of the Fed emphasized the two-sided risks of loosening policy too quickly, risking higher inflation, or tightening too much and sending the economy into contraction.
Recent data showed progress in reducing inflation but policymakers were cautious about declaring victory too soon, fearing a repeat of mistakes made in the past. The hikes have had minimal effect on overall economic growth, with GDP gains averaging above 2% in the first half of 2023. Employment growth has slowed but remains robust, with unemployment at its lowest level since the late 1960s.
Some Fed officials have indicated that while rate cuts are unlikely this year, further rate hikes could be on hold. Market pricing also suggests a low probability of additional increases before the end of the year.
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