Fed saw smaller hikes ahead to assess prior moves, show July minutes

Pace of future Fed hikes depends on data, no evidence inflation subsiding, July minutes show

Federal Reserve officials judged in July it would eventually be appropriate to decelerate the pace of interest-rate increases while evaluating the effects of their tightening actions to date.

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

“Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the committee could tighten the stance of policy by more than necessary to restore price stability,” the minutes showed. 

Following the release, two-year Treasury yields and the dollar pared gains, while US stocks trimmed losses.

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

Even so, the S&P 500 index of US stocks has risen about 9% since the July gathering. Fed officials will have a chance to offer fresh views on the outlook during their Aug. 25-27 retreat in Jackson Hole, Wyoming.

The language used in the minutes echoed what Powell said at the press conference after the July meeting. His comments ignited the move higher in stocks when he suggested that the central bank could transition to smaller rate hikes going forward. Even so, he left the door open to another “unusually large” increase at the next meeting in September, depending on economic data to be published in the interim.

A Labor Department report published Aug. 5 -- which showed companies added 528,000 employees to payrolls last month, more than double what forecasters were expecting -- prompted investors to bet on a third straight 75-basis-point hike when the Fed meets Sept. 20-21.

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

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

The softer July inflation figures gave legs to the stock-market rally as previous bets on a big rate hike in September were unwound, and investors are now assigning similar odds to a half-point or a three-quarter-point increase, according to prices of futures contracts tied to the Fed’s benchmark rate.

August numbers on jobs and consumer prices are due out before the September meeting.