Federal Reserve officials claimed to see signs of a slowing U.S. economy in July but still considered inflation “unacceptably high.”
The slowdown prompted economists to wonder whether Federal Reserve Chair Jerome Powell will deliver a third 75-basis-point rate increase when Fed officials reconvene at their September 20-21 meeting.
“The Fed really is fighting a sentiment battle right now … trying to prepare markets to the idea that they have more wood to chop,” said Andrew Patterson, a senior international economist at Vanguard.
Before Powell and Fed officials decide in September, economists will have a chance to digest the upcoming monthly jobs report and data on consumer prices in August.
On Wednesday, the Federal Open Market Committee (FOMC) released minutes from its July 26-27 meeting, where members of the Fed’s rate-setting body said they would take appropriate action to tame inflation, irrespective of a strong job market or concerns that additional rate hikes could trigger a recession.
“A significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently,” read the minutes.
“Whether we are technically in a recession or not doesn’t change my analysis,” stated Minneapolis Fed president Neel Kashkari. “I’m focused on the inflation data.”
Kashkari’s hawkish stance on inflation underscores the likelihood that rate hikes will persist throughout the remainder of the year.
Monetary policymakers made clear in July’s minutes they would continue raising rates enough to slow economic growth.
July’s Consumer Price Index (CPI) supported a slight pullback, showing that annual consumer inflation eased in July to 8.5% from 9.1% the prior month.
The drop in CPI has led some analysts to price in a 50-basis-point increase for next month. However, mixed economic data suggests the central bank has a long way to go before the Fed achieves its annual 2% inflation goal.
Still, the Fed noted that slower growth in August could “set the stage” for inflation to fall closer to the central bank’s goal.
As Powell decides how much to raise interest rates next month, factors like solid employment, a drop in inflation, and a weakening housing market will influence the decision.