Federal Reserve minutes indicate that a September interest-rate increase remains possible, even as futures markets increasingly expect policymakers to leave rates unchanged. The central bank will decide at its September 15-16 meeting after receiving a July report on personal consumption expenditures, or PCE, inflation and an August employment report.
The Fed kept its policy rate unchanged in the 3.50%-3.75% range at its July 28-29 meeting. It has remained at that level since December. The minutes, released on Wednesday, showed that three policymakers dissented in favour of a quarter-percentage point hike.
The July vote was 9-3 to leave rates unchanged, with three policymakers dissenting in favour of a quarter-percentage point hike. The minutes suggest that more than three officials could vote to raise rates in September. They indicate that the vote could become a 7-5 split, although the precise margin remains unknown.
Many participants said policy tightening will likely be needed to bring inflation back to the Fed's 2% target. Policymakers arguing for an increase warned that failure to act would risk "a steeper and potentially more costly sequence of tightening moves at a later stage".
Inflation data have nevertheless eased slightly. The consumer price index, or CPI, rose 3.4% in the 12 months through July, down from 3.5% in June. Core CPI increased 2.5% in the 12 months through July after climbing 2.6% in the prior month.
Both measures remain above the Fed's target. Inflation has been running above 2% for more than five years. Analysts estimate that core PCE, the Fed's preferred measure of underlying inflation, still looks on course to be a bit above 3%.
John Williams, the head of the New York Fed, expects inflation to continue to ease as the effects of last year's tariff increases and the Middle East war abate. He said the central bank could keep its policy rate unchanged.
The likelihood of a rate increase next month has diminished following soft inflation and employment data. Firms unexpectedly shed jobs in July. Traders added to bets favouring no change at the September 15-16 meeting after the latest CPI data.
Fed funds futures contracts traded at CME Group put the chance of a rate hike next month at 38%, or roughly one-in-three. Bank of America Global Research said in an Aug. 7 note that a September rate increase was still "firmly in play". The three votes to raise rates in July pointed to a more hawkish direction within the Federal Open Market Committee, or FOMC.
The July PCE inflation report and the August employment report will help determine whether the softer data continue. The minutes show that a September hike cannot be ruled out. Markets and policymakers are therefore approaching the meeting from different starting points.
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