Late last month, there was not a lot of evidence available for Federal Reserve officials to assume that inflationary pressures were easing off.
The minutes of the Fed’s meeting on July 26th and 27th showed that the officials had decided to slow down the economy in order to control the rise in prices.
The previous policy meeting’s minutes were released on Wednesday and they did not explicitly indicate the pace that would be adopted in terms of increase in rates in the future, including the September meeting.
However, what they showed was that the policymakers of the Fed are committed to increasing the interest rates as high as required in order to control inflation.
But, they also acknowledged that there was a possibility that they would go too far and economic activity may slow down excessively.
The minutes said that all participants were in agreement with the fact that there was not much evidence to show that inflation was coming down.
Some of the inflation may be reduced through decreases in fuel prices and that of other commodities and improvement in global supply chains.
However, higher borrowing costs would have to do most of the heavy lifting, as both households and businesses would spend less as a result.
An important dimension
While the minutes indicated that inflation was the primary concern for the Fed, they also flagged yet another important dimension of the debate of the officials in the coming months.
This is deciding when the speed of rate increases should be slowed down and how to determine if the hikes in interest rates have gone beyond the point required for taming prices.
The minutes were termed as ‘dovish’ by a lot of traders and they adjusted their bets to indicate that the Fed would increase the interest rates by 50 basis points in their September meeting.
However, market experts indicated that the minutes showed that the Fed would react to the data that would come in.
Pace of increases
It is quite possible that the Fed may decide to slow down the pace of rate hikes in the next month, as the minutes said that they would assess the impact of the tightening on the economy.
They further indicated that the evaluation would determine if it was time to move from the larger 75 basis points increases made in the June and July meetings to 50 basis points and then 25 basis points hikes.
However, the ultimate level of the rates was still left up in the air. There were some participants who thought that rates would have to reach a specific level and stay there for a while.
This would be to control inflation that has touched four-decade highs and seems to be a tad too difficult to control.
There are also those who believe that the Fed would have to tighten the policy more than required in order to bring price stability, especially considering the time it takes for the policy to change economic behavior.