Fed officials signal possible rate hike if inflation stalls

Federal Reserve officials indicated that further interest-rate tightening may be required if inflation does not show more progress, according to minutes released from the July 28-29 policy meeting. The summary noted that many participants believed additional tightening would likely be necessary, and some said current financial conditions were not yet restrictive enough to bring inflation back to the 2% target.

The Federal Open Market Committee voted 9-3 to keep the federal funds rate in the 3.5%-3.75% range, unchanged from earlier this year. The three dissenting votes came from regional presidents Beth Hammack, Lorie Logan and Neel Kashkari, who argued that a quarter-point hike could help avoid a steeper, more costly tightening path later.

Recent data have shown modest month-to-month price gains, but inflation remains well above the Fed’s target, with the personal consumption expenditures price index up 3.7% year-over-year despite a 0.1% monthly decline in June. The labor market also showed signs of weakening, as nonfarm payrolls fell by 23,000 in July while the unemployment rate slipped to 4.1% amid a shrinking labor force.

Chairman Kevin Warsh signaled a patient stance on rates, and his post-meeting comments were interpreted as dovish, prompting a rise in Treasury yields. Yields later fell after the Treasury Department announced increased purchases of longer-dated government debt.

Market expectations have shifted, with traders now pricing a likely hold on rates until December before a possible hike, versus earlier expectations of a September increase. The minutes also recorded a discussion about reducing the FOMC meeting schedule from eight to six per year to allow more data to accumulate between meetings, though no decision was made.

Additionally, the committee addressed a recent disruption to transaction settlements, noting that ample bank reserves helped keep money markets orderly, and it reviewed the Fed’s balance-sheet holdings, with a task force set up by Warsh to examine the issue.