Fed Minutes Indicate Future Rate Hikes to Tame Inflation
The FOMC decided to raise the target range for the federal funds rate to 2.25 to 2.50 percent
The Federal Reserve released the minutes from its meeting from 26-27 July and indicated that more monetary tightening is expected while inflation remains high in the U.S.
Some highlights from the Fed minutes:
“Participants agreed that there was little evidence to date that inflation pressures were subsiding. They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and would likely stay uncomfortably high for some time.”
“Participants concurred that the pace of policy rate increases and the extent of future policy tightening would depend on the implications of incoming information for the economic outlook and risks to the outlook.”
“Participants judged that a significant risk facing the Committee was that elevated inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently. If this risk materialized, it would complicate the task of returning inflation to 2 percent and could raise substantially the economic costs of doing so.”
“Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the committee could tighten the stance of policy by more than necessary to restore price stability.”
What it Means: Investors were closely watching for any indication that the central bank would take a wait-and-see approach, but that does not seem to be the case. Michael Gapen, chief U.S. economist for Bank of America, told The New York Times that “Further rate hikes are clearly in the cards.”
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He noted that the U.S. had a strong jobs report earlier this month and if the September report comes back equally strong, that could lead to another 75 basis point increase. But he said if the jobs report comes in low, the Fed could become slightly more dovish.
“More uncertainty means you should move at a more cautious pace,” he said.
The yield on a 10-year U.S. Treasury note rose about 0.3 percent to 2.894 percent since the beginning of the month. Chris Verrone, a partner at research firm Strategas, told The Wall Street Journal that higher yields are a reason to doubt the stock-market rally’s endurance.
TREND FORECAST: The U.S., EU, and U.K. all have inflation rates at or about the same levels as countries like Mexico, but their interest rates are far below the Mexican level.
For example, the U.K. inflation rate is expected to hit 13 percent this year and their interest rate is just 1.75 percent while Mexico’s inflation rate is expected to hit 10 percent and they have an 8.5 percent interest rate.
The point being, the Western nations will do all they can to keep pumping in monetary methadone to keep the money junkies on their high and artificially stimulate failing economies.