Federal Reserve signals more scepticism over need for further rate rises

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Federal Reserve officials have become more wary about the need to keep raising interest rates despite unanimously backing an increase in the benchmark rate last month, according to minutes from the July meeting.

A number of policymakers raised concerns that the risks of “overtightening” monetary policy versus not doing enough to bring down persistently high inflation had become more evenly balanced or “two-sided”.

Even as policymakers continued to fret about the risks of elevated inflation, the minutes appeared to show growing unease about the effects of the Fed’s tightening campaign on the economy. Officials unanimously backed a 25 basis point rate rise last month.

A couple of participants indicated a preference to hold rates steady, arguing that doing so “would likely result in further progress toward the committee’s goals while allowing the committee time to further evaluate this progress”.

July’s quarter-point increase raised the federal funds rate to a target range of 5.25-5.5 per cent, the highest level in 22 years. It followed a brief pause in June, when officials adopted a more gradual approach to tightening monetary policy following the most aggressive campaign in decades. 

Economists broadly expect that last month’s rate increase will have been the final one of the year, even though the central bank’s officials in June projected the benchmark rate would peak a quarter of a percentage point higher at 5.5-5.75 per cent. 

Fed chair Jay Powell stressed last month that the Federal Open Market Committee would digest the “totality” of the economic data ahead of the next meeting in September, but acknowledged that “given how far we’ve come, we can afford to be a little patient” when it comes to further rate rises. 

Inflation remains too high for the Fed’s liking, even as price pressures have eased in recent weeks and are expected to keep receding in the coming months. While the labour market has further cooled, consumer spending on goods and services has remained strong despite higher borrowing costs than just over a year ago, when the Fed’s benchmark interest rate hovered near zero.

Fears that the US economy would tumble into recession have ebbed as a result, with Fed staffers scrapping their call for a mild contraction this year. Still, they expect a “noticeable slowdown in growth”, according to Powell, who has long been optimistic about the prospects for a so-called soft landing.

Pausing rate rises again in September would give the Fed more time to take stock of how the economy is responding to earlier increases, or whether borrowing costs need to rise further to drive inflation back down to the longstanding 2 per cent target. 

While officials continue to debate the need for additional action, they appear more unified about keeping the benchmark rate at a level that restrains demand for an extended period. No official has suggested the Fed will cut rates this year. According to futures markets, traders broadly expect the central bank to hold off cuts until well into 2024.