US Fed sees more rate hikes coming, as inflation remain ‘elevated’

  • By: Kaustav Roy
  • Date: August 19, 2022
  • Time to read: 3 min.

The US central bankers have hinted at more interest rate hikes in the coming quarters, as it tries to tame inflation in the economy, according to the minutes of the July joint meeting of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, released on Wednesday.

The central bank often uses the minutes of past meetings to communicate its thinking but policymakers provided few clear clues on Wednesday. They said it would be appropriate to slow the rate increases “at some point” but gave no indication on the exact timeframe.

The US Federal Reserve has raised the benchmark borrowing rates four times this year, including two hikes of 75 basis points each in June and July, as it tries to soften demand to reduce prices that have surged at the fastest pace in over 40 years. The inflation in the US surged to 9.1 percent in June, which led to a more aggressive stance from the Fed. 

In the minutes of the July FOMC meeting, the officials said it would take some time to bring down the inflation to the FOMC’s objective of 2 percent and acknowledged that inflation remained “unacceptably high”.

As per experts, it is almost certain that the Fed will raise rates again when the central bank officials meet next in September but the question is about the quantum of increase. The next FOMC meeting is scheduled for September 20 – September 21, 2022.

Another 75 basis points increase would be a strong indication that policymakers are determined not to relax their efforts until they see clear evidence that inflation has slowed, according to the New York Times. 

The benchmark rate in the US was slashed to zero at the start of the Covid-19 pandemic but has since been gradually raised and sits in the range of 2.25 to 2.5 percent. The pace of future rate hikes would depend on incoming macroeconomic data and inflation, according to the Federal Reserve chairman, Jerome Powell. 

That led some investors to conclude that policymakers were likely to ease the pace of rate increases, especially after the government reported that inflation had slowed more than expected in July. In a news conference after the meeting, the Federal Reserve chairman Jerome Powell said the 75 basis points increases was “unusually large”. 

The participants of the meeting noted that consumer expenditures, housing activity, business investment, and manufacturing production had all decelerated from the robust rates of growth seen in 2021 while the labor market remained strong. 

In the minutes of their July meeting, Fed officials said there was some evidence their actions were “starting to affect the economy, most visibly in interest-sensitive sectors, even before the full effect of their policies has been felt.  

They observed that spending and production indicators suggested that the second quarter of this year had seen a broad-based softening in economic activity. Hence, the Fed officials remarked that some of the slowing, particularly in the housing sector, reflected the emerging response of aggregate demand to the tightening of financial conditions associated with the tighter monetary policy.

According to data released earlier this week, US housing starts last month fell 9.6 per cent from June, much more than the expected 2.5 per cent drop anticipated by economists polled by Dow Jones. The slowing of the housing market suggested that higher borrowing costs are beginning to take a toll.

The FOMC said it would continue to monitor the implications of incoming information for the economic outlook and would be prepared to adjust the stance of monetary policy as appropriate. 

Kaustav Roy

Author - Kaustav Roy

World Business Reporter - View All Articles
Kaustav is a freelance journalist covering business news from around the world. Kaustav joined InterSpaceReporter as a freelance journalist on Monday 15th August 2022.

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