Inflation Concerns Rekindle Rate Hike Debate: What 5 Top Economists Say After July FOMC Minutes Reveal

Zinger Key Points
  • The minutes from the Federal Open Market Committee have also sparked divisions among economists.
  • Market-implied probabilities for a rate hike by the FOMC November meeting have surged to 39%.

The recently released July FOMC minutes have laid bare the growing divergence of views among Federal Reserve officials, with a majority emphasizing the presence of “significant upside risks to inflation, which could require further tightening of monetary policy.”

This sentence, widely seen as hawkish, sent ripples through the market, leading to a surge in the U.S. dollar and a further rise in Treasury yields, while stocks stumbled to session lows.

Several takeaways for investors are emerging as economists analyze the minutes in greater detail.

Fed Is Still Data-Dependent

Bill Adams, chief economist for Comerica Bank, highlighted that a “quarter percentage point rate hike (is) on the table before year-end, but (the Fed) does not commit to it.” The Fed minutes indicate that the FOMC will leave interest rates steady at its next meeting on Sept. 20, with the following decision on Nov. 1 being data dependent.

According to the expert, if the economy keeps growing and wages remain elevated, the Fed might find reason to raise rates by a quarter-point in the last quarter of the cycle at the Nov. 1 meeting.

Sam Milette, fixed income strategist for Commonwealth Financial Network, said that a significant conclusion emerges from the July FOMC minutes: central bankers maintain the possibility of further rate hikes in response to escalating inflationary pressures. However, the expert noted the minutes generally lack major revelations, aligning with the consensus that the Fed’s data-driven approach will continue steering the course of monetary policy in the coming months.

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Is The Fed Bluffing Now?

“The Fed wants to talk tough on inflation, but it's obvious they are done with rate hikes,” Jamie Cox, managing partner for Harris Financial Group said. The expert believes that the July FOMC minutes are not signaling a pivot back to large rate hikes.

Hawks Poised To Gain The Upper Hand

With the majority of officials sounding the alarm on inflationary pressures, hawks appear to rule, according to Jeffrey Roach, chief economist for LPL Financial. However, a significant takeaway from the July FOMC minutes is that “committee members are highly attentive to the lagged impacts from tighter policy, it's completely possible that the Fed could pause this year despite inflation above 2% in the near term.”

“Hawks argue for another rate hike as insurance to anchor inflation expectations,” said Quincy Krosby, chief global strategist for LPL Financial. The expert believes that the July 26 rate hike was most likely not a one and done. Recent GDP estimates and strong retail sales data pose a challenge for the Fed’s pursuit of price stability, further adding to the risks of another rate hike.

The SPDR S&P 500 ETF Trust SPY closed 0.7% lower for the day, while the Invesco QQQ Trust QQQ slipped 1.1%.

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