Recently, during the Federal Reserve’s July 25-26 meeting, most officials expressed concerns about high inflation and the potential need for further interest rate increases. However, they also noticed some indications that inflation pressures might be easing. This mixed view aligns with Chair Jerome Powell’s cautious position on future rate hikes.
The minutes from the meeting highlight that “most participants continued to see significant upside risks to inflation” and felt that more tightening of monetary policy might be necessary. Despite signs of progress, inflation still exceeded the Fed’s 2% target, and they required more data to confirm that inflation pressures were indeed subsiding.
While some analysts predict that the Fed may halt rate hikes this year and instead consider rate cuts in 2024 due to a consistent trend of lower inflation, the Fed has consistently stated that it wants inflation to return to the 2% range before adjusting its rate increase strategy.
Sam Millette, a fixed income strategist for Commonwealth Financial Network, emphasized that the minutes did not rule out further rate hikes if inflationary pressures increase.
Looking ahead, there is uncertainty about whether the Fed will raise rates in September. After the July meeting, the Fed provided minimal guidance regarding future rate increases. Goldman Sachs economists recently projected that the Fed would skip a rate hike in September and potentially begin rate cuts by the middle of next year.
Data since the last meeting indicates a potential “soft landing” for the economy, where it slows down enough to bring inflation closer to the central bank’s target without entering a severe recession. The Fed has already raised its key rate to a 22-year high of approximately 5.4%.
The latest readings of “core” prices, which exclude volatile food and energy costs, show a further cooling of inflation. Core prices increased by 4.7% in July compared to the same month the previous year, marking the smallest increase since October 2021. Fed officials closely monitor core prices as they provide a more accurate assessment of underlying inflation.
Overall consumer prices rose by 3.2% in July compared to the previous year, driven by higher gas and food costs. However, this is still significantly lower than the peak inflation rate of 9.1% in June 2022.
Remarkably, the economy has experienced this progress without a significant increase in unemployment, contrary to what many economists had anticipated after the rapid series of interest rate hikes implemented by the Fed, which were the highest in four decades.
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