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Federal Reserve minutes reveal angst regarding ‘Upside Inflation Risks’

Commentaries & Views

The minutes from the July FOMC meeting were released today. The document indicated that most Federal Reserve officials still believe that high levels of inflation are an ongoing threat and merit additional interest rate hikes. However, there was not an overall unison regarding the path forward in what can be best described as mixed messages amongst Federal Reserve members.

One of the primary takeaways was that members were divided over the question of further rate hikes. While most Fed officials were in favor of an increase in the terminal interest rate (Fed funds rate), some members believe that further hikes might take rates too high.

According to an article in The Wall Street Journal, “Minutes of the July policy meeting, released Wednesday, said some officials thought the risks of raising rates too much versus too little “had become more two-sided, and 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 divided Federal Reserve reveals mixed messaging

Numerous mixed messages were revealed by Fed members. Although “most” senior voting members were in favor of a further increase in interest rates, there were a few notable dissenters to that view. Philadelphia Fed President Patrick Harker, a voting member said, “I believe we may be at the point where we can be patient and hold rates steady.”

In addition, presidents of both Boston and Atlanta federal banks revealed that they were in favor of a longer pause. Last week Susan Collins, President of the Boston Federal Reserve Bank said, “The risks of doing too much have increased and are much closer to balance, relative to the risks of not doing enough.”

Other Fed members expressed apprehension about the real possibility that underlying price pressures may prove to be more persistent as a direct result of a tight labor market. A tight labor market would allow workers to bargain for higher pay and that would make it more difficult to reduce inflationary pressures.

Also in an interview last week, Tom Barkin, President of the Federal Reserve Bank of Richmond expressed uncertainty that inflation could be moved to the Fed’s 2% target, “If the economy is softening as you would expect. If it’s not, then I do wonder about the policy path.”

Yesterday, Neel Kashkari, President of the Minneapolis Federal Reserve Bank reinforced the idea of more rate hikes when he said that the Fed “Is not ready to declare victory in the battle over high inflation.”

Overall, there is a consensus that the Federal Reserve will not raise rates at the next FOMC meeting in September. At the same time, according to the CME’s FedWatch tool, there is a one in three chance that the Fed will implement one more 0.25% rate hike this year. Since interest rate hikes this year have resulted in bearish market sentiment taking gold lower, today’s minutes will most likely continue that trend.

As of 4:30 PM EDT, gold futures basis the most active December contract is currently down $11.50 or 0.59% and fixed at $1923.70. Today’s price decline was based on a mixture of dollar strength and traders bidding the precious yellow metal lower. Currently, the dollar (DX) is up 0.26% and the index is fixed at 103.36.

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