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According to the minutes from the July meeting, Federal Reserve officials are exercising caution about continuing to raise interest rates despite concerns about inflation. While participants unanimously supported a quarter-point increase during the meeting, some policymakers expressed worries over the risk of “overtightening” monetary policy. This signifies a more cautious approach from the Fed, suggesting that the central bank’s aggressive rate-rising campaign is nearing its end.
However, US markets experienced a sell-off on Wednesday, with the Nasdaq Composite and the S&P 500 closing down 1.2% and 0.8%, respectively. Treasury holdings were also sold, leading to a 10-month high of 4.28% in the 10-year yield. There is growing unease among officials about squeezing the economy further due to expectations of a slowdown in consumer spending, cooling labor market conditions, and tightening credit conditions.
While concerns about elevated inflation remain, there is a need for further evidence that price pressures are subsiding in order to be confident that inflation is on track to meet the 2% target. The minutes also reveal continued disagreement among economists regarding the need for further tightening. Despite projections in June that the benchmark rate would peak between 5.5-5.75%, economists now anticipate last month’s rate increase to be the last one of the year.
Leading US economist Nancy Vanden Houten believes that further rate rises are not predetermined, and she maintains her stance that the Fed has already completed its campaign to raise borrowing costs. Fed Chair Jay Powell emphasized the need for patience and consideration of economic data ahead of the next meeting in September.
Although there has been a decrease in price pressures and fears of a recession have eased, there is still an expectation of a noticeable slowdown in growth. Pausing rate rises in September would provide the Fed with more time to evaluate the impact of previous increases and determine if further tightening is necessary to control inflation.
Officials acknowledge that there is significant uncertainty regarding the effectiveness of the rate rises over the past 18 months in cooling the economy. They also expect tighter credit conditions resulting from regional banking crises to impact economic activity in the coming months.
While there are ongoing discussions about the need for additional action, there is a stronger consensus on maintaining a benchmark rate that restrains demand for an extended period. No official has suggested further rate cuts this year, with futures markets indicating that traders expect the central bank to hold off on cuts until at least 2024.
Once the Fed eventually cuts its benchmark rate, it is likely that several officials will advocate for reducing the balance sheet by ceasing to reinvest the proceeds of maturing Treasuries and agency mortgage-backed securities.
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