Fed Signals Need for Additional Rate Hikes as Inflation Cooling Delays

A majority of U.S. Federal Reserve officials have determined that additional interest rate hikes are necessary should the cooling of price increases prove insufficient. According to the minutes of the Federal Open Market Committee (FOMC) meeting held on the 28th and 29th of last month, released by the Fed on the 19th (local time), some officials pointed out that current financial conditions may not be sufficiently restrictive to return the inflation rate to the Fed’s 2% target. Some among them warned that delaying rate hikes could necessitate steeper and economically costlier consecutive tightening measures in the future. Although the Fed kept the benchmark interest rate steady at 3.50–3.75% at the time, the minutes made no mention of opinions supporting a rate cut.

During the vote at the time, three of the 12 voting members—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lori Logan—cast dissenting votes. They argued for a 0.25 percentage point increase, viewing upward pressure on prices as broad-based. Their contention was that a more restrictive policy stance was necessary to continuously achieve the goals of price stability and maximum employment.

Officials’ assessment of the economy was solid. They evaluated that economic activity is expanding at a robust pace and that the labor market remains stable, with demand and supply largely in balance. However, they viewed the uncertainty surrounding the inflation outlook as still high. There were concerns that the re-escalation of conflict in the Middle East was clouding the price outlook significantly, and that a prolonged conflict could exert additional upward pressure due to supply chain disruptions. Some officials noted that investment in artificial intelligence (AI) infrastructure could boost aggregate demand, thereby increasing inflationary pressure.

The minutes also included discussions on reducing the frequency of FOMC meetings. Fed Chair Kevin Wallach solicited opinions from officials on a plan to reduce the number of FOMC meetings, currently held eight times a year, to six. The intention is that extending the interval between meetings to about two months would allow for the accumulation of more economic indicators and time to review policy issues. However, no decision was made on adjusting the meeting frequency, and there are no changes to the remaining FOMC schedule for this year.

Officials also agreed to comprehensively review balance sheet policy in the future. Market functioning, financial stability, the impact of the balance sheet on financial conditions, and the appropriate maturity composition of the U.S. Treasury securities held by the Fed were cited as topics for discussion. However, a majority of officials reaffirmed their existing stance that the primary tool for adjusting the monetary policy stance should be changes to the target range for the federal funds rate, rather than the size of asset holdings.