FOMC meeting minutes leave open Fed's next steps;  The intensity of the tightening depends on economic indicators

FOMC meeting minutes leave open Fed’s next steps; The intensity of the tightening depends on economic indicators

The minutes of the last meeting of the US Federal Reserve’s Open Market Committee (FOMC) came in line with what was announced after the latest Fed decision. On August 27, the Fed raised interest rates by 75 basis points. The minutes of the meeting stated that the monetary authority will monitor upcoming indicators of the economy, such as inflation, the labor market and activity indicators. Thus, I have left the door open for adjustments that can be as aggressive as the last, or softer, in the following encounters.

The document says the decision to follow the data rather than set specific guidance stems from the fear that the Fed will unreasonably raise interest rates.

Some members of the university maintained the rhetoric that the rate could remain at a restricted level for a longer period, to control inflation. Federal Reserve officials also recognize that it may take longer than expected for the price hike to dissipate.

According to the minutes, the meeting participants realized that monetary tightening could slow down the pace of economic growth. However, they saw the return of inflation to the target as critical to the survival of the labor market sustainable.

This year, the US central bank has already raised interest rates by 225 points in total, at a rate between 2.25% and 2.50%. Inflation in the United States, in turn, is the highest in four decades and is three times higher than the target (which is 2%).

Participants in the FOMC meeting noted that the price was around the neutral level and some said a restrictive level might be appropriate.

“With inflation remaining well above the committee’s target, participants judged that a shift to a restrictive policy stance was necessary to fulfill the FOMC’s legislative mandate to promote maximum employment and price stability,” the minutes said.

For Gustavo Cruz, strategist at RB Investimentos, the minutes were too outdated, as they did not capture the data released after the last meeting. He points out that “the text says that the labor market was showing signs of slowing down and that inflation is still high, and the data that came later indicated the opposite.”

In the minutes, the Fed also said that, recognizing that its tightening policy has an impact on inflation, it could slow the rate hike movement.

“Participants felt that as the monetary policy stance became more restrictive, it would probably be appropriate at some point to slow the pace of interest rate hikes. While assessing the effects of cumulative monetary policy adjustments on economic activity and inflation.”

Cruz thought the tone of the document was doves; “What you can get from the message is that the Fed’s plan was to slow down. However, the feasibility of that will depend on the following indicators,” he says.

For CT, the minutes were more extremist than the market thinks. “The possibility of a 75 basis point increase in September remains on the table, and we expect the market to re-price it properly as we approach the September meeting,” the analysts wrote. Citi is one of the houses betting on a 75 basis point rate hike at the September meeting.

For Morgan Stanley, the tone of the FOMC meeting minutes was balanced, expressing the committee’s desire to slow rate hikes, but on the condition that it be in accordance with the behavior of inflation, without removing the possibilities of sharper hikes. In short, the minutes revealed a strong commitment to remain on the tight path of monetary policy, above the neutral level, and to maintain this higher level of interest for a longer period.

The minutes of the Fed meeting hit the market with a certain smell of mothballs, as some important indicators appeared after the last meeting of the monetary authority, which led to the emergence of new prospects. The Consumer Price Index (CPI) was flat in July, cutting a bullish cycle and surprising the market. The performance of manufacturing activity as measured by the Empire State Index, in turn, recorded the second largest drop in its historical series in July.

The market is expecting more accurate signals from the Federal Reserve, including the latest data, at the central bankers meeting in Jackson Hole, Wyoming. This year’s meeting begins next Thursday (25). But the Fed’s next monetary policy meeting is scheduled for September 20-21, and until then many indicators are expected.

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