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Fed Officials Refrained from Celebrating at July Meeting

Officials from the Federal Reserve acknowledged a recent slowdown in inflation at their July meeting, as revealed in the minutes released on Wednesday. However, they refrained from declaring victory and emphasized that inflation remained “unacceptably” high. Most officials also saw continued risks of higher inflation, which could lead to further interest rate hikes.

The Federal Reserve has been gradually raising interest rates over the past year and a half to cool down the economy and curb inflation. Although inflation has cooled off in recent months, investors are questioning whether policymakers will continue to raise borrowing costs.

In July, policymakers raised interest rates to the highest level since 2001. However, given the recent slowdown in inflation and the significant increase in interest rates, some officials at the meeting questioned the need for further rate hikes. Nonetheless, the majority of officials supported the decision to raise rates and suggested that there could still be further adjustments in the future.

The minutes showed that officials welcomed the recent progress in slowing down price increases but remained cautious. They stressed the need for further evidence that inflation is on a path towards normalization. Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.

At the same time, Fed officials acknowledged the potential costs of higher interest rates on the economy. Higher rates can slow down hiring and make it more expensive for businesses to borrow, potentially leading to higher unemployment and even a recession.

Following the release of the minutes, stock prices initially dipped but later rebounded. The two-year Treasury yield also nudged higher, indicating the market’s expectations of future rate hikes.

Analysts at BMO Capital Markets noted that the release of the minutes had a limited impact on prices. They maintained their assumption that there will be no rate hike in September but suggested that another hike in November or December is possible.

Fed officials are currently facing a complex economic landscape as they assess whether their policy adjustments have been sufficient to bring inflation back to their target of 2 percent. While there are signs of cooling in the job market, consumer spending remains strong, unemployment is low, and wage growth is solid. These factors could contribute to higher inflation.

Officials also noted the high degree of uncertainty regarding the impact of their previous rate adjustments on demand. Tight financial conditions and the stabilization of the housing market were highlighted as factors that could influence consumption. However, the Fed’s staff economists have revised their previous expectation of a mild recession at the end of the year and now expect a small increase in the unemployment rate in the coming years.

Predicting the future trajectory of inflation is challenging due to various factors. While cheaper gas has been contributing to lower price increases, gas costs have rebounded in recent months. On the other hand, rental costs continue to ease, which should help subdue inflation. Additionally, slower growth in China could weigh on global commodity prices and indirectly affect US inflation.

Fed officials have also been reducing their balance sheet of bond holdings, which can impact asset prices. They suggested that this process could continue even after interest rates start to decline, demonstrating their commitment to reducing their holdings.

Overall, Fed officials remain cautious about inflation and see the need for further evidence before making any changes to monetary policy.

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