Thought the Fed Might Back Off on Rate Hikes Soon? You Were Mistaken

With some softening in inflation and some slowing in the producer price index, many had started to hope that the Federal Reserve might begin to pull back on the interest rate increases. The CRE industry would welcome that news. Except, it probably isn’t coming. At least not this year.

The Fed released the minutes from its July meeting. Granted, it is a backwards-looking mirror of about two weeks, but close enough to give a sense of how the Central Bank is looking at the economy and its plans. The sense is that mild improvement in some parts of the economy isn’t enough for a big change.

“Recent indicators of spending and production have softened,” they wrote. “Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

“In assessing the appropriate stance of monetary policy, the [Federal Open Market] Committee will continue to monitor the implications of incoming information for the economic outlook,” they continued. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

It’s an extended way of telling markets not to get hopes up too soon.

“The Fed minutes stressed that the campaign to curtail inflation [will continue] until the Fed believes inflation has fallen enough to reach levels commensurate with price stability,” Quincy Krosby, chief global strategist for LPL Finance, said in an emailed note. “This suggests that the market’s optimistic reaction to Chairman Powell’s July press conference was premature. That a parade of Fed speakers came out with a nearly orchestrated response following the July Fed meeting warning market participants that the Fed is by no means close to easing its campaign was dismissed by the market.”

“It’s a no-brainer to expect rate hikes to continue near-term,” added Bill Adams, chief economist for Comerica Bank, in a separate note. “As the Fed’s July monetary policy statement said, the FOMC “anticipates that ongoing increases in the target range will be appropriate,” and that still holds, even with WTI back under $90 a barrel. Comerica forecasts a half percentage point increase in the fed funds rate at the Fed’s next meeting in September, but it’s a close call between that and another hike of three quarters of a percent.”