FOMC Minutes Indicate Next Move Will Be Hike

Although Federal Open Market Committee members do not see the current monetary policy as particularly accommodative, they expect their next move on interest rates to be a tightening, according to minutes of the Aug. 5 meeting released yesterday.

The increased cost of borrowing and drop in the availability of credit as a result of financial market turmoil and macroeconomic risks prompted FOMC members to view current monetary policy as not especially accommodative.

The FOMC believed leaving rates alone at the August meeting “was appropriate and would most effectively promote progress toward the committee’s dual objectives of maximum employment and price stability,” the minutes relate. However, members agreed a tightening is “likely,” with the timing and extent of any change based on “evolving economic and financial developments and the implications for the outlook for economic growth and inflation.”

In the panel’s discussion of monetary policy for the intermeeting period, “members agreed that labor markets had softened further, that financial markets remained under considerable stress, and that these factors — in conjunction with still-elevated energy prices and the ongoing housing contraction — would likely weigh on economic growth in coming quarters.”

Members also saw continuing downside risks to this outlook, “particularly reflecting possible further deterioration in financial conditions.” The FOMC expects inflation will moderate; however, members “emphasized the risks to the inflation outlook posed by persistent high readings on headline inflation and a possible unmooring of inflation expectations.”

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