FOMC Minutes Warn of "Significant Inflation Risks" Persisting... Divergent Views on Further Hikes

Officials from the U.S. Federal Reserve (Fed) reaffirmed significant concerns about inflation, leaving room for further interest rate hikes. However, some officials also warned that excessive tightening could trigger an unnecessary economic recession.

[Image source=Reuters Yonhap News]

According to the minutes of the July Federal Open Market Committee (FOMC) meeting released by the Fed on the 16th (local time), participants confirmed that the fight against inflation is not yet over as they resumed raising interest rates. The minutes stated, "Most participants acknowledged that inflation remains significantly above the price stability target and that substantial upside inflation risks persist amid a tight labor market," adding, "This may require additional restrictive monetary policy." There is concern that inflation may not fall as quickly as expected. Recently strong economic indicators are also cited as factors supporting this caution toward tightening.

Earlier, at last month's FOMC, the Fed raised U.S. interest rates to 5.25-5.5%, the highest level since 2001. This was the 11th rate hike since the Fed began its rate-hiking cycle in March last year and marked a resumption of increases just one month after a unanimous hold at the June FOMC. Fed Chair Jerome Powell, at the subsequent press conference, left open the possibility of either raising or holding rates at the next meeting in September, depending on incoming data.

At that meeting, participants agreed that inflation was "unacceptably high," while cautiously noting "tentative signs that inflationary pressures may be easing." They also discussed the so-called "two-sided risk"?the concern that excessive tightening could unnecessarily shrink the economy, while moving too quickly to easing policies could repeat past mistakes of inflation surging again.

The minutes noted, "Participants observed that uncertainty about the economic outlook remains high," and "agreed that future policy decisions will depend on incoming comprehensive data, economic outlook, inflation developments, and the impact on the balance of risks." This aligns with Chair Powell’s remarks that future rate decisions will effectively be made in real-time meetings based on the latest data. The minutes emphasized that data released over the coming months will be crucial in clarifying the inflation containment trend and determining further monetary policy.

It was also confirmed that some participants advocated for holding rates steady at last month’s FOMC. While all 11 voting members unanimously agreed to raise rates in July, some dissenting opinions were expressed among the full panel of 18 members. These members argued that another pause in rate decisions was necessary to assess the cumulative impact of tightening policies on the overall economy. They also pointed out ongoing concerns that further rate hikes could push the economy into recession and increase unemployment.

However, Fed economists have withdrawn their earlier forecast of a mild recession within the year. The minutes stated, "The economic projections prepared for the July FOMC were stronger than those in June," and "they no longer expected the U.S. economy to enter a mild recession by year-end."

Investors’ attention is now focused on next week’s Jackson Hole forum. The key question is what signals Fed Chair Jerome Powell will send at this event. Since the last FOMC, some officials, including Patrick Harker, President of the Federal Reserve Bank of Philadelphia, have ruled out rate cuts this year while suggesting that the rate hike cycle may be ending. With about a month remaining until the September FOMC, there are still many inflation and employment indicators to monitor. However, recent economic data such as July retail sales in the U.S., released the day before, showed stronger-than-expected results, raising concerns that the Fed’s tightening could be prolonged.

Currently, the market largely expects rates to hold steady in September. According to the CME FedWatch tool, federal funds futures markets on the afternoon of the day reflected more than an 88% probability of a Fed hold in September. Although the Fed’s June dot plot indicated the possibility of one more hike this year, investors are betting on a scenario with no further rate increases. There are three remaining FOMC meetings this year?in September, November, and December.

As the Fed signals inflation concerns, the New York stock market is under downward pressure this afternoon. The tech-heavy Nasdaq index fell about 1% compared to the previous session. The Dow Jones Industrial Average, composed of blue-chip stocks, and the large-cap S&P 500 index showed slight declines.

This content was produced with the assistance of AI translation services.