The minutes show Fed members see "upside risks" to inflation that could lead to more rate hikes

At their most recent meeting, Federal Reserve officials were worried about how fast inflation was going and said that more rate hikes could be needed if things stayed the same. Minutes from the meeting were released on Wednesday.

This was talked about during a two-day meeting in July, and the result was a rate hike of a quarter of a percentage point. The markets believe this to be the last rate hike of this cycle.

But the talks showed that most members are worried that the fight against inflation is not over and that the Federal Open Market Committee, which sets interest rates, might have to tighten them even more.

The meeting summary said, "With inflation still well above the Committee's long-term goal and the labour market still tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy."

With this most recent increase, the Fed's key borrowing rate, the federal funds rate, is between 5.25% and 5%; this is the highest amount it has been in more than 22 years.

Some members have said since the meeting that they don't think the rates need to go up any further, but the minutes show that they should be careful. Officials said that there was pressure from several different factors and emphasised that future choices would be based on the data coming in.

"When participants talked about the policy outlook, they still thought it was important that the monetary policy stance be tight enough to bring inflation back to the Committee's 2 per cent goal over time," the document said.

Lots of question marks

The minutes showed a lot of worries about where the policy was going.

Even though everyone agreed that inflation is "unacceptably high," there were also "a few tentative signs that inflation pressures might be easing."

"Almost all" of the people at the meeting, including those who didn't have a vote, agreed that the rate should go up. But those who were against it said they thought the committee could skip a walk and see how the earlier ones affected the economy.

"Participants, in general, noted a high level of uncertainty about the effects of past monetary policy tightening on the economy as a whole," the minutes said.

In the minutes, it was said that the economy was expected to slow down and that unemployment was likely to increase slightly. But experts on the staff changed their earlier prediction that problems in the banking industry could cause a mild recession this year.

Problems with real estate

But problems with industrial real estate caused worry.

In particular, officials talked about "risks linked with a possible sharp drop in CRE valuations, which could hurt some banks and other financial institutions, like insurance companies, that have a lot of exposure to CRE. Several people talked about how vulnerable some "nonbank financial institutions" like money market funds and other similar things are.

Members talked about the risks of loosening policy too quickly, risking higher inflation and tightening policy too much, and sending the economy into a recession.

Recent data shows that inflation is still a long way from the central bank's goal of 2%, but it has come a long way since June 2022, when it was above 9%.

For example, the consumer price index, a popular way to measure how much things cost, had a 12-month rate of 3.2% in July. The Fed's favourite measure, the personal consumption expenditures price index excluding food and energy, was 4.1% in June.

But officials worry that calling victory too soon could lead to the same big mistakes that were made in the past. In the 1970s, when prices were increasing by double digits, the central bankers raised interest rates to try to stop it. However, they quickly stopped when prices started to go down again.

Even though the goal of the increases was to slow down the economy, they didn't have much of an effect on growth as a whole.

The economy has grown by an average of more than 2% in the first half of 2023, and new forecasts from the Atlanta Fed show that it will increase by another 5.8% in the third quarter.

At the same time, job growth has slowed down a bit but is still strong. In July, the jobless rate was 3.5%, which was close to the lowest it had been since the late 1960s. Some job openings are at high levels, but many more people are still looking for work than jobs.

Some Fed officials have recently said that rate drops are unlikely to happen this year, but that rate hikes might be over. Regional Presidents John Williams of New York and Patrick Harker of Philadelphia, for example, both said last week that they could see a way to hold the queue here. CME Group data shows that there is less than a 40% chance of another increase before the end of the year; this highly suggests that there won't be any more hikes.