Fed Members Support Restrictive Stance on Interest Rates to Contain Inflation

According to the minutes of the Fed July 26-27 meeting, central bank members agreed that interest rates should be cut to a restrictive level to reduce inflation towards the central bank's target.

The Federal Open Market Committee raised its benchmark interest rate by 0.75% to a range of 2.25% to 2.5% at the end of its previous meeting on July 27. "Participants ... indicated that shifting to an appropriately restrictive policy stance was necessary to prevent inflation expectations from stabilizing," the minutes said. In the press conference following the monetary policy statement, Fed Chair Powell signaled that the central bank may consider pausing rate hikes after the September meeting to assess the impact of tightening on the economy and inflation. According to the minutes, there was support among members at the July meeting for reassessing the pace of tightening at some point, while some were in favor of keeping the Fed's benchmark interest rate at a "sufficiently restrictive level" for some time to ensure that inflation was firmly on track to return to 2%. Since the July Fed meeting, signs of falling inflation and economic data, including monthly job growth, have strengthened bets on less hawkish rate hikes. But Fed members have been quick to push back against the prospect of reducing the pace of monetary policy tightening, reiterating that the fight against inflation is far from over. Earlier this month, Federal Reserve Bank of San Francisco President Mary Daly noted that "inflation remains very high and nowhere near our price stability objective." The slowdown in inflation last month was mainly due to a drop in energy prices, but core inflation, which excludes food and energy, will play a key role in determining whether inflation will remain high for longer. Robert Conzo, CEO of The Wealth Alliance, told Investing.com in an interview on Tuesday, "All eyes will be focused on how sticky core inflation is... That will start to drive the next leg of the inflation debate." The Fed has raised interest rates by 225 basis points, or 2.25%, in just five months, sparking concerns that the central bank could overreach in tightening monetary policy and push the economy into recession. While the Fed has repeatedly pointed to a strong labor market as an indicator of economic strength, the central bank is "starting to worry about recession fears," Conzo said, adding that the possibility of a 50 basis point rate hike for September is "priced in." More clues on monetary policy are just a week away as investors await Powell's remarks at the Jackson Hole Economic Symposium on August 25-27.