Dive Brief:
- Many Federal Reserve officials at their July 28-29 meeting flagged the threat to the economy from persistent inflation and the possible future need to raise the benchmark interest rate, according to minutes of the meeting released Wednesday.
- The minutes indicate concern about inflation risks extended well beyond the three policymakers who dissented at the meeting against a decision to hold the federal funds rate steady. The dissenters called for a quarter-point increase in the rate from the current level between 3.5% and 3.75%.
- “Many participants highlighted the possibility that, after several years of inflation above 2%, continued elevated inflation rates could begin to affect inflation expectations and wage- and price-setting decisions,” according to the minutes. “Many participants assessed that policy tightening would likely be necessary if inflation did not decline.”
Dive Insight:
Price pressures have shown signs of easing since the Federal Open Market Committee met last month, affirming the committee’s decision to keep borrowing costs steady.
The consumer price index excluding volatile food and energy prices rose 2.5% for the 12 months ending in July after a 2.6% gain in June.
Inflation including all items increased 3.4% on an annual basis after rising 3.5% in June as energy prices last month fell 1.5%, the Bureau of Labor Statistics said on Aug. 12.
Referring to policymakers who voted not to change the main rate, Yardeni Research President Ed Yardeni said Wednesday that “July’s subdued inflation readings support their case for holding rates steady” at the next scheduled monetary policy meeting set to take place Sept. 15-16.
Still, at least one dissenter has held a hawkish stance favoring higher interest rates.
“We need to act to bring inflation back down towards our target” of 2%, Cleveland Fed President Beth Hammack said Thursday, noting that “inflation that has been missing our target for more than five years.”
“It's really critical that we act now to make sure that we can bring inflation back down to target,” she said in response to a question at an event in Dayton, Ohio. “The longer that inflation stays above our goal, the harder it is to bring it back down, and the more pain that's experienced by individuals and businesses across the world.”
Hammack and other hawkish policymakers can point to data backing the case for tightening, Yardeni said.
“Recent labor demand and consumer spending data suggest that the economy is healthy enough for a rate hike, supporting the hawks,” he said in a note.
Other policymakers, while not supporting an increase in the main rate last month, have voiced impatience with the persistence of price pressures and a determination to curb inflation to 2%.
“Inflation is too high,” Fed Governor Lisa Cook said in an Aug. 5 speech. “This has been my long-held view, and I have noted that inflation has moved significantly away from our target over the past year.”
Warning of the same risks as Hammack, Cook said, “with five years of above-target inflation, the risk grows that higher inflation may become entrenched in price- and wage-setting behavior, leading to persistence that would be much harder for us to attack.
“The longer inflation is above target, the more likely this scenario becomes,” she said.
