Fed: Interest rates at ‘restrictive levels’ to control inflation

Federal Reserve officials reiterated last month that future rate hikes would be shaped by the evolution of incoming data, with some noting that rates would need to remain at “sufficiently restrictive levels” for “some time” in order to to control inflation, according to the minutes of the July meeting (26-27) published today.

Central bankers admitted at the same time that it may take longer than expected for inflation to slow down and that the slowdown in aggregate demand as part of the central bank’s strategy “will play an important role in reducing inflationary pressures”.

Fed members also confirmed that the development of inflation and the economy will determine their next decisions, without taking a clear position on a smaller rate hike of 50 basis points or another increase of 75 basis points at the next meeting on the 20 and September 21.

The Fed has already made two consecutive 75 basis point interest rate hikes. Overall, since the start of the year, the Fed has raised interest rates by 225 basis points to between 2.25% and 2.50% as it tries to rein in the highest inflation in 40 years.

“Little evidence” that inflation is slowing

The minutes of the July meeting also showed that officials saw “little evidence” that inflation was slowing. Analysts estimate that the Fed will need to see evidence before its next meeting that inflation has started to slow down in order to proceed with a decision on a more modest rate hike.

At the same time, some Fed officials expressed concern about the “significant risk” that higher inflation could take hold if the public begins to question the central bank’s resolve to raise interest rates to rein in inflation.

On the other hand, “many” Fed officials expressed concern about the risk that the central bank’s monetary policy tightening could turn out to be too much.

“Many” officials noted the risk that the Fed “could end up tightening policy direction more than necessary to restore price stability.”