FOMC Minutes: Fed Gives Hawkish Outlook As Inflation Still 'Unacceptably High', More Rate Hikes On Cards Ahead

In the latest minutes of FOMC, the Federal Reserve sounded hawkish as they continue to see inflation significantly above their tolerance limit. This has increased the possibility of a rate hike in forthcoming policies, which was enough to dampen sentiments on Wall Street on August 16.

The Federal Reserve on Wednesday released the minutes of the Federal Open Market Committee meeting that was held on July 25-26, 2023.

In the minutes, FOMC said, "continued to see significant upside risks to inflation, which could require further tightening of monetary policy."

Although, FOMC cited a number of tentative signs that inflation pressures could be abating. These signs included some softening in core goods prices, lower online prices, evidence that firms were raising prices by smaller amounts than previously, slower increases in shelter prices, and recent declines in survey estimates of shorter-term inflation expectations and of inflation uncertainty.

But at the same time, FOMC also 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 toward the Committee's 2 per cent objective.

According to FOMC, even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate; these included the possibility that the macroeconomic effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated.

Also, the FOMC acknowledged that the economic activity had been expanding at a moderate pace. They also concurred that job gains had been robust in recent months, and the unemployment rate had remained low. Inflation had remained elevated. However, they believe that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation but that the extent of these effects was uncertain.

In the case of US banking systems, FOMC continued to see the sector as "sound and resilient."

FOMC members agree that they would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, members concurred that they will take into account the cumulative tightening of monetary
policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Additionally, FOMC agreed to continue to reduce the Federal Reserve's holdings of Treasury securities agency debt and agency mortgage-backed securities, as described in its previously announced plans.

Further, FOMC minutes concluded that the Fed would continue to monitor the implications of incoming information for the economic outlook. They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

Overnight, following the FOMC minutes, Wall Street tumbled with the Dow Jones Industrial Average index plunging 0.52%, while the S&P 500 index shedding 0.8%, and the tech-heavy Nasdaq Composite Index plummeting by at least 1.2%, taking the worst hit.

In July, Fed hiked the federal funds rate by 25 basis points to 5-1/4 to 5-1/2 per cent, in line with expectations. With that, the key rates of the US is at their highest level since 2001. However, Fed chair Jerome Powell in his policy speech hinted that inflation is stubbornly above the Fed's target of 2% and there is a long way for it to calm down. This does stir expectations of further rate hikes in upcoming policies, however, many experts have mentioned that the July 2023 policy hike would be the last of the cycle.

Fed seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In the press conference on July policy, Powell dismissed the rate cut possibility scenario in the current year. For next year, he hinted that rate cuts will depend upon how confident they are.