Most Fed members flag upside risks to inflation as sign job not yet done

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Investing.com — Most Federal Reserve officials flagged “significant” upside risks to inflation as a sign that further rate hikes could be needed to slow the economy just as upbeat data forced the central bank to ditch its recession call, according to the minutes from the July 25-26 Federal Open Market Committee meeting published Wednesday.

“[M]ost participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the showed.

Some participants, however, appeared hesitant to embrace further hikes, on concerns that the tightening in financial conditions since the beginning of last year could “prove more substantial than anticipated,” the minutes added.

At the conclusion of its previous meeting on July 26, the Federal Open Market Committee lifted its benchmark to a range of 5.25% to 5.5%, the highest level in 22 years.

Fed reverses call for recession this year 

Recent signs of economic strength, driven by ongoing consumer spending, forced Fed staff to ditch their call for a “mild” recession later this year.

“Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year,” the minutes showed. 

Against the backdrop of a more resilient economy, and a still-strong labor market, the central bank remains wary of declaring victory on inflation, and stressed the need for further evidence that inflation remains on a sustainable downward path.

Data arriving in coming months would “help clarify the extent to which the disinflation process was continuing,” the minutes added.

Markets continue to back no more hikes for this year, rate cuts for early 2024

The Fed’s data dependent stance implies that the September meeting remains a live decision that will depend on the totality of the data, Morgan Stanley says, though continues to reiterate that it “sees a path to no further hikes.”  

Traders see just a 12% chance the Fed may hike rates in September, and a 35% chance of a hike by November, with a hike by December seen as even less likely, according to the

Bets that rate hikes are in the rearview mirror have quickly shifted attention to rate cuts, with some on Wall Street expecting policy easing to come as soon as early next year.

“Our baseline forecast calls for the FOMC to start cutting the funds rate in 2024 Q2,” Goldman Sachs said in a recent note.

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