MNI: Upside Inflation Risk Could Require More Tightening -Fed

Most Federal Reserve officials are still worried that inflation pressures, while improving, are not yet fully under control and could call for additional monetary policy tightening, minutes from last month's meeting of the FOMC released Wednesday showed.

Still, policymakers are hoping the cumulative weight of aggressive Fed interest rate hikes that have taken the federal funds rate more than a full 5 percentage points higher in just 18 months, to a 5.25%-5.5% range, is getting close to doing enough to soften demand and put a lid on a two-year surge of inflation.

“Most participants continued to see upside risks to inflation, which could require further tightening of monetary policy,” the Fed minutes said.

“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks the achievement of Fed goals had become more two sided.”

Fed officials cited “a number of tentative signs that inflation pressures could be abating” although several FOMC members also expressed concern that services inflation outside of housing was not yet showing signs of cooling.

“They stressed that inflation remained unacceptably high and that further evidence would be required for them to be confident that inflation was clearly on a path” back to the official 2% target.

SOFT LANDING HOPES

The minutes reaffirmed Chair Powell’s comments during his press conference that Fed staff were no longer penciling in a recession as their base case, though they still see downside risks to growth. (See MNI INTERVIEW: Odds Of Soft Landing Have Improved-Fed’s Kliesen)

Since then, job market and inflation data have cooled further, although the economy itself has shown hints of acceleration rather than a slowdown. CPI for July saw a modest rebound in the annual rate of inflation to 3.2% while core inflation dipped but remained elevated at 4.7%.

Markets are betting that the Fed is done raising interest rates and could start cutting them as soon as early 2024.

However, some policymakers are still worried underlying inflation pressures may be plateauing at still-high levels rather than following a concerted path downward. Fed Governor Michelle Bowman has said she would like to see additional rate increases in order to ensure the inflation fight is successfully won, while Minneapolis Fed President Neel Kashkari said this week he's not ready to say the Fed is done hiking despite some positive signs of progress.