Federal Reserve officials at a July policy meeting hinted at the idea of a soft landing for the U.S. economy, suggesting that a recession will likely be avoided but cautioning on the need for near-term rate hikes.
The minutes of the Fed's policy meeting that ended July 26 reflect both the central bank's official statement, as well as comments from Chairman Jerome Powell to reporters that followed the central bank's decision to lift its benchmark lending rate by 0.25 percentage point to a 22-year high of between 5% and 5.25%.
Policymakers also noted that inflation pressures remain "unacceptably high." They added that more data were needed to determine whether price pressures were firmly on the patch toward the Fed's 2% target following a two-year-low headline-consumer-price-index reading of 3% in June.
"Since the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year," the minutes indicated.
"However, the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level," the minutes read.
U.S. stocks were modestly lower following the release of the minutes at 2 p.m. Eastern Time, with the Dow Jones Industrial Average down 62 points on the session and the S&P 500 falling 16 points alongside a corresponding rise in Treasury bond yields.
Benchmark 10-year note yields were pegged at 4.262%, nearing the highest levels in fifteen years, while 2-year notes changed hands at 4.980%. The dollar index, which tracks the greenback against a basket of six global currencies, was up 0.23% to 103.413.
CME Group's FedWatch now indicates an 88.5% chance that the Fed will hold rates steady at its next meeting in September, with bets on a quarter-point increase in November rising to around 35.4%.
"Participants noted the recent reduction in total and core inflation rates," the minutes indicated. "However, they stressed that inflation remained unacceptably high and that further evidence would be required for them to be confident that inflation was clearly on a path toward" the policy-making Federal Open Market Committee's 2% objective.
Solid retail sales for the month of July showed the key control group reading -- which feeds into GDP calculations -- surging 1% from the prior month. The report added to hopes that consumers were weathering the Federal Reserve's aggressive rate hikes while continuing to leverage the earnings power of a historically tight labor market.
The spending rush, however, has revived concerns that the Fed might need to lift rates once more between now and the end of the year keep inflation from ticking higher over the autumn months.
Further signs of a recovery in the housing market added to that concern, with July housing starts rising by a faster-than-expected 3.9%, to an annualized rate of 1.452 million units. That's even as the Mortgage Bankers' Association said 30-year mortgage rates matched a 2001 high of 7.16% last week.
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