Fed Meeting Minutes Indicate That an Interest Rate Hike Is Soon Likely
The Federal Reserve Board released the minutes from their July meeting this week, and revealed that the group is planning on making interest rate moves sooner than expected.
Meeting minutes show that Fed officials are making plans to taper off their monthly bond purchases, most likely before the end of this year. When the Fed buys monthly bonds as they currently do, this injects more money into the economy and financial markets overall, making lending easier and, in turn, lowering — or, as is the case now, keeping interest rates low.
Once the Fed decides to “taper bond purchases”, or reduce the amount of bonds purchased each month, this will effectively increase interest rates. This happens as a result of the money supply in the open market being “tighter” and banks having to raise interest rates on borrowers. When there is a tighter money supply, rising interest rates make it financially prohibitive for the masses to borrow, thus putting a type of constraint on the economy.
In July, the FOMC indicated that the taping of bond purchases did not necessarily mean that interest rates would increase immediately. There has been widespread consensus that the Fed and its members are eyeing an early 2022 rate hike at the earliest. Market conditions, however, might force their hand.
Unrelenting prices and tight labor markets might force the Fed to raise interest rates officially before they intended to do so. Tapering bond purchases is typically seen as the first step in tightening the money supply. From there, though, the official increase in interest rates is dependent on market conditions such as inflation and the employment rate. While employment is slowly rebounding, unemployment rates are still higher than pre-pandemic levels, indicating the need for easy money policies to stick around. At the same time, the economy is experiencing inflationary levels not seen in decades, and a labor market participation rate that is still not optimal.
These factors all point to potential overheating of the economy, where prices run away from real value. In this situation, the Fed would have no choice but to raise interest rates to pull the reins on runaway prices and force the hand of job seekers who might be riding the wave of unemployment benefits as long as they can.
As of July, the unemployment rate still stood at 5.4%, and in May, private-sector job openings remained at their highest level since the data began being collected 21 years ago. These figures will take time to fix, and if they do not resolve on their own, the Fed could need to push up their interest rate hike expectations further than they might like.
More From GOBankingRates
- Take Our Poll: Are You Actually Spending Your Child Tax Credit Payment?
- 5 Things Most Americans Don’t Know About Social Security
- Here’s How Much You Need To Earn To Be ‘Rich’ in Every State
- The Hidden Costs of Education at Every Level
Last updated: August 19, 2021