ALBAWABA – The Federal Reserve (Fed) is concerned about the still-resilient United States (US) economy not cooling in time, with Fed officials divided on further hiking US interest rates, news agencies reported Thursday.
At their policy meeting in July, the minutes of which had just been released on Wednesday, Fed officials seemed to be divided over whether inflation will recede in time. Or whether there is a need for further US interest rate hikes moving forward, according to Bloomberg.
“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes of the Fed’s July 25-26 policy meeting.
Yet, two Fed officials favored leaving rates unchanged or “could have supported such a proposal,” the New York-based news agency reported.
Instead, the Federal Open Market Committee ultimately authorized another US interest rate hike at the end of the meeting, the minutes showed.
The July rate hike brought the target range for the Fed’s benchmark rate to 5.25-5.5 percent, which is the highest level in 22 years.
Notably, the Fed had pinned US interest rates back in June for the first time since the tightening began in early 2022.
“Minutes from the July FOMC meeting frame the emerging tension between inflation data that is moderating faster than the Fed anticipated and growth data that is coming in stronger than the Fed anticipated,” Evercore ISI economists, led by Krishna Guha, said in a note after the release.
While quarterly June projections showed most officials then favored two more hikes in 2023, Fed Chair Jerome Powell emphasized after the July decision that the Fed will take things meeting by meeting.
Investors currently do not expect another rate increase this year, according to futures contracts, Bloomberg reported.
However, the implied odds – in the minutes of the Fed’s July meeting – of a hike at the October 31-November 1 meeting are higher than those for their next meeting on September 19-20.
Still, Bloomberg’s investors continue to see the Fed cutting rates in in 2024, with the benchmark seen falling to around 4.25 percent by the end of next year.
Is a recession still possible with more US interest rate hikes?
Within the Fed, Reuters claimed there are officials who saw a US recession as plausible, and that it would – based on the central bank’s March meeting – begin in 2023.
In May and June, the Fed staff projections "continued to assume" the US economy would be in recession by the end of the year, according to the Canada-based news agency.
However, based on the minutes of the July meeting, "the [Fed] staff no longer judged that the economy would enter a mild recession toward the end of the year".
Yet, Fed staff do price in a slowdown that would bring the economy’s growth rate below its long-run potential in 2024 and 2025, with inflation dropping and risks "tilted to the downside", according to Reuters.
But the Fed policymakers' projections, which are issued on a quarterly basis and are independent of the staff view, never showed GDP contracting on an annual basis.
Still, with the economy resilient, government, public and business spending going strong and service spending running high, the possibility exists that inflation could resurge.
Should that happen, alongside a tighter-than-expected economy, and Fed policy needs to become even stricter and induce the inflation-killing downturn that officials still hope to avoid, according to Reuters.
"We've been wavering for a while on whether to shift to the 'soft-landing' camp, but no longer," Sal Guatieri, a senior economist at BMO Capital Markets, told Reuters.
"Broad strength" in the economy, he said, "convinced us that the US economy is more durable than expected ... Not only is it not slowing further, it might be picking up."
He, among others, including Fed officials, seem to be in favour of the plausibility of a soft-landing.
