Fed minutes reveal appetite for rate hikes as inflation lingers

Minutes from the Federal Open Market Committee's July meeting, released Wednesday, show a contingent of officials ready to push rates higher if inflation doesn't retreat toward the Fed's 2% target — a signal advisors betting on a rate hold may want to watch closely.

With Fed Chair Kevin Warsh opting to drop the forward guidance, the minutes are coming under increasing scrutiny for hints as to the central bank’s strategy. The latest minutes are hardly music to the ears of any advisors looking for the Fed to hold off on tightening policy.

Last month, in its second meeting with Warsh as chair, the Federal Reserve maintained its strategy of keeping its policy rate steady at 3.5% to 3.75%. The Federal Open Market Committee said that it approved Wednesday's decision by a 9-3 vote. Committee members Beth M. Hammack, Neel Kashkari, and Lorie K. Logan voted against the policy, and preferred to raise the target range for the federal funds rate by 1/4 of a percentage point.

The minutes provide some insight into the meeting’s machinations. “Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” they said. “Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent.”

“A few of the participants who favored raising the target range for the federal funds rate at this meeting judged that doing so would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage,” the central bank added.

While members noted that the unemployment rate was largely unchanged and that solid growth in economic activity had continued, inflation remained elevated relative to the Committee’s 2% goal.

The Consumer Price Index certainly points to the elevated inflationary environment. July’s CPI was 3.4% over the last 12 months, although this was down slightly from 3.5% in June, which saw CPI hit its highest level in three years.

On Wednesday afternoon, the CME’s FedWatch tool puts the probability of rates being unchanged at 67.3% for September’s Fed meeting. A hike to between 3.75% and 4% has a likelihood of 32.7%, according to the tool, which updates in real time.