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Fed Officials Refrained from Celebrating at July Meeting

Federal Reserve officials welcomed a recent slowdown in inflation at their July meeting, minutes released on Wednesday showed, but they stopped short of declaring victory. Instead, officials stressed that inflation remained “unacceptably” high and “most” saw continued risks of higher inflation that might prod the central bank to raise interest rates further.

Fed policymakers raised interest rates to a range of 5.25 to 5.5 percent on July 26, the highest since 2001. Officials have lifted borrowing costs sharply over the past 17 months — first adjusting them rapidly, and more recently at a slower pace — to slow the economy. By making it more expensive to borrow and spend, they have been hoping to cool demand and wrangle inflation.

But given how much rates have risen in recent months and how much inflation has recently cooled, investors have been questioning whether policymakers are likely to lift borrowing costs again. Inflation eased to 3.2 percent in July on an overall basis, down sharply from a high of more than 9 percent in mid-2022.

Officials at the Fed meeting did welcome recent progress on slowing price increases, but many of them stopped short of signaling that it could prompt them to back down on their campaign to cool the economy. The minutes showed that “a couple” of the Fed’s policymakers did not want to raise interest rates in July, but most supported the move — and suggested that there could still be further adjustment ahead.

“Participants noted the recent reduction in total and core inflation rates” but 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” back to normal, the minutes showed.

With inflation still unusually high and the labor market strong, “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the minutes added.

Still, Fed officials did acknowledge that they would need to take the potential costs to the economy into account. Higher interest rates can slow hiring sharply, partly by making it more expensive for companies to get business loans, potentially pushing up unemployment and even tipping the economy into a recession.

“It was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening,” a “number” of policymakers noted.

Fed officials are facing a complicated economic picture as they try to assess whether they have sufficiently adjusted policy to return inflation to 2 percent over time. On one hand, the job market shows signs of cooling and the rate moves that the Fed has already made are still slowly trickling out to restrain the economy. Yet consumer spending remains surprisingly strong, unemployment is very low, and wage growth is solid — momentum that could give companies the wherewithal to charge their customers more.

Officials noted that there was a “high degree of uncertainty” about how much the moves they have already made will continue to temper demand. Financial conditions are tight, meaning it is tough and expensive to borrow, which officials thought could weigh on consumption. At the same time, the housing market seems to be stabilizing, and some officials suggested that “the housing sector’s response to monetary policy restraint may have peaked.”

The resilience of the economy has prompted the Fed’s staff economists — an influential bunch of analysts whose forecasts inform policymakers — to revisit their previous expectation that the economy would fall into a mild recession late this year.

“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 said. They did still expect a “small increase in the unemployment rate relative to its current level” in 2024 and 2025.

It is tricky to guess how quickly inflation will slow going forward, because there are a lot of moving parts. For instance, cheaper gas had been helping to drag price increases lower — but gas costs began to rebound in the second half of July, a trend that has continued into August.

At the same time, rental costs continue to ease in official inflation data, which should help calm the overall numbers. And China is growing more slowly than many economists had expected, which could help weigh on global commodity prices and slow American inflation around the edges.

“Participants cited a number of tentative signs that inflation pressures could be abating,” the minutes showed. Those included softer increases in goods prices, slowing online price gains, and “evidence that firms were raising prices by smaller amounts than previously,” among other factors.

Fed officials have also been shrinking their balance sheet of bond holdings, a process that can take some steam out of asset prices but that will also leave the central bank with a smaller footprint in financial markets. Officials suggested in the minutes that the process of winnowing it could continue even after interest rates begin to come down, something they have forecast to begin next year — illustrating their continued commitment to paring back their holdings.

“A number of participants noted that balance sheet runoff need not end when the Committee eventually begins to reduce the target range for the federal funds rate,” the minutes said.

Joe Rennison contributed reporting.

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