An account of the debate at the Federal Reserve’s July policy meeting,
set to be published after two weeks of whiplash on Wall Street, will
probably offer clues as to what would push the central bank to go big
with tightening yet again in September.
Fed officials’ decision at their July 26-27 gathering to raise their
benchmark interest rate by three-quarters of a percentage point for a
second straight month marked the fastest pace of tightening since the
early 1980s. And since then, betting in financial markets on the size
of the next move in September has swung between 50 and 75 basis points
on reports alternately showing a stronger-than-expected labor market
and inflation below forecasts.
The minutes, due out at 2 p.m. in Washington on Wednesday, probably
won’t settle the matter. But they could indicate what kind of data Fed
officials would need to see to favor another “unusually large”
increase — which Chair Jerome Powell, at a press conference following
the July meeting, said could be on the table for the Sept. 20-21
gathering as well.
“If there is going to be new information, it would be around the idea
of: Are further rate hikes likely to be of a smaller incremental size,
or is the door really open to something larger?” said Michael Gapen,
head of US economics at Bank of America in New York.
“Cost-benefit analysis shifts in the direction of smaller hikes — and
the inflation data probably helped them out that way — but you get
another strong labor-market report and it might be hard for them not
to go 75” basis points again, Gapen said.
Fed officials who have spoken since the July meeting have pushed back
against any perception that they’d be pivoting away from tightening
any time soon. They’ve made it clear that curbing the hottest
inflation in four decades is their top priority.
The July jobs data, published by the Labor Department on Aug. 5,
showed companies added 528,000 employees to payrolls last month, more
than double what forecasters were expecting, and the unemployment rate
ticked down to 3.5%, matching the pre-pandemic low. That report
prompted investors to bet on a third straight 75-basis-point hike.
But the department’s Aug. 10 readout on consumer prices showed they
rose 8.5% in the 12 months through July, down from the 9.1% increase
in the year to June that had marked the highest inflation rate since
1981. That was enough to largely unwind previous bets, and investors
are now assigning similar odds to a half-point or a
three-quarter-point increase, according to prices of futures contracts
tied to the Fed’s benchmark rate.
The central bank has been raising rates since March. Fed officials
have increasingly admitted they feel like they were too slow to begin
doing so, which prompted them to go first from quarter-, then to
half-, and finally to three-quarter-point hikes to catch up as
Following the July increase, the target range for the benchmark rate
stands at 2.25% to 2.5%, a level many officials feel is roughly
“neutral” for the economy.
“We’re going to be making decisions meeting by meeting,” Powell told
reporters at the July 27 press conference. “We think it’s time to just
go to a meeting-by-meeting basis and not provide the kind of clear
guidance that we had provided on the way to neutral,” he said.
August numbers on jobs and consumer prices are due out before the
September meeting, and will probably be critical in shaping market
expectations ahead of that decision.
In public commentary since the July meeting, Fed officials have
emphasized they are far away from declaring victory on inflation and
have asserted that rate hikes will probably continue into next year,
after which rates will remain elevated for some time.
Investors, on the other hand, are betting the central bank will start
reversing course with rate cuts by mid-2023.
“We’re trying to look for any clues to gain knowledge on what they are
really going to feel comfortable with on the inflation front,” said
Tom Porcelli, chief US economist at RBC Capital Markets in New York.
Any information the minutes can provide on “what would be a
comfortable down-shift in inflation, and how long they would want to
see it go on for,” will be read closely, he said.