Rate Expectations Shift Following Fed Meeting Minutes

Expectations for the Federal Reserve’s next interest rate hike at its upcoming meeting in September have shifted following yesterday’s release of minutes from the Fed’s July meeting.

Ahead of the release, traders had been evenly divided between an increase of 50 basis points (bps) and an increase of 75 bps, according to CME Group, based on fed funds futures data. However, after the release of the minutes, a majority of traders were betting on a 50-bp increase at the meeting.

In the minutes, Fed officials signaled that while they would continue to hike interest rates to bring down inflation, it “would likely be appropriate at some point to slow the pace of policy rate increases.” Some officials indicated that once the policy rate had reached a sufficiently restrictive level, it would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to the Fed’s target rate of 2%. 

Policymakers also acknowledged the risk of overdoing rate increases. “Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary,” the minutes said.

Federal Reserve officials will gather next week to discuss monetary policy and the economy at the Kansas City Fed’s Jackson Hole symposium on August 25 to 27.

“The Fed is likely to gain even more confidence in its rate-raising plans and pace given the continued strength of the labor market and the resiliency of consumer spending, despite the fact that inflation remains near 40-year highs. Stock investors are feeling that confidence, and have been putting money back to work across sectors, driving the S&P 500 up more than 10% in the past month,” mentioned Caleb Silver, Editor-in-Chief of Investopedia.