Interest Rates May Stop Upward Swing ‘At Some Point,’ July Fed Minutes Suggest — Experts Clash on How Soon

U.S. Washington, D.C. Fed Benchmark Interest Rate Raising - 27 Jul 2022

The Federal Reserve released the minutes of its July 26-27 Federal Open Market Committee (FOMC) meeting on Aug. 17, noting that “in discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.”

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According to the minutes, participants concurred that “the pace of policy rate increases and the extent of future policy tightening would depend on the implications of incoming information for the economic outlook and risks to the outlook.”

Experts Offer a Variety of Analysis on July Fed Minutes

Jamie Cox, managing partner for Harris Financial Group, told GOBankingRates: “I don’t think anyone can read the Fed minutes and say they are pivoting; however, it is clear that the rate hikes are having their intended effect of lowering demand, and by extension, inflation.”

Cox added that — given how quickly some data points have shifted to suggest inflation has peaked and is falling — “I would expect the pace of rates to step down from here. Fifty basis points is likely the ceiling for September.”

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The participants noted that 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 the minutes.

Some participants noted, however, that, “It likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2%.”

Jeffrey Rosenkranz — portfolio manager, Shelton Capital Management — told GOBankingRates that the minutes “had a little something for everyone, but not enough for anything conclusive.”

“With the Fed’s language about a slowing pace being appropriate at some point and concern about over-tightening, investors looking for a dovish pivot might be encouraged,” he said. “On the other hand, strong words about the risks of the market not believing their forward guidance and resolve to conquer inflation, deeming ongoing hikes as appropriate, and downplaying the impact of cooling commodity prices all serve as reminders that the fight continues and financial conditions need to remain tight.”

He added that when put in the proper context (that these minutes from July 27th are stale at this point), “There will be ample opportunity for Fed governors to drive a more current message at Jackson Hole next week and elsewhere. This will coincide with the typical end of summer dearth of liquidity in the markets which will exacerbate volatility over the next few weeks.”

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Although inflationary pressures have eased, there remain pockets of seemingly entrenched inflation — particularly concerning food prices, rent and labor wages, Quincy Krosby, chief global strategist for LPL Financial, told GOBankingRates.

“That a parade of Fed speakers came out with a nearly orchestrated response following the July Fed meeting warning market participants that the Fed is by no means close to easing its campaign was dismissed by the market,” Krosby said.  “It appears likely that Chairman Jerome Powell will use — and should use — the Jackson Hole meeting as a chance to have the market re-calibrate its projections of the Fed’s trajectory. Moreover, he needs to underscore, yet again, that price stability is the Fed’s ultimate goal.”

Fed Raised Interest Rates Before, and Likely Will Again

At the meeting in July, as was widely expected, the Fed said it will raise interest rates by three-quarters of a percentage point rate in a back-to-back move following June’s historic raise. The new unanimous decision came amid inflation at a 41-year high and fears of a looming recession.

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Chair Jerome Powell said in a press conference on July 27 that, given the inflation data, said rate hike was the “appropriate thing to do.”

According to the minutes, “participants perceived falling commodity prices — particularly for oil — and the FOMC’s commitment to bringing inflation down as pointing to lower inflation ahead. Market-based measures of near-dated inflation compensation declined and continued to suggest that inflation would ease in coming quarters.”

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Ben Vaske, investment research analyst at Orion Advisor Solutions, told GOBankingRates that while the FOMC noted that headlines such as falling gasoline prices may lower inflation rates in the short term, there is very little evidence that inflationary pressures are broadly easing.

“These comments are much more hawkish than dovish, once again, and a 50 to 75 basis point increase in the federal funds rate should be expected at the next Fed meeting, while these increases will only begin to slow ‘at some point’ in the future,” Vaske added.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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