Fed will keep raising rates until inflation cools down, minutes show

Federal Reserve officials last month agreed it would be necessary to continue raising interest rates to battle hot inflation, though they also discussed slowing the pace of hikes "at some point" to assess how the economy is digesting higher borrowing costs, minutes from their last policy meeting show.

Why it matters: The minutes indicate the Fed's resolve to raise interest rates to a level that sufficiently slows the economy — and, officials said, keep it at that level until it's clear inflation is slowing down.

Catch up quick: The minutes are from the Fed's July 26-27 meeting, where officials agreed to raise interest rates by three-quarters of a percentage point after an identical move in June. These were the steepest rate increases since 1994.

The backdrop: Since the Fed gathered last month, there have been new updates on how the economy evolved, including a report that showed plummeting gasoline prices dragged the Consumer Price Index down to zero in July.

• The minutes released Wednesday do provide a clue that alone won't be enough to soothe Fed officials anxious about rising prices. At the meeting, officials agreed that "declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound."

The big picture: The minutes largely reflect the tone of Fed chairman Jerome Powell, who told reporters after the policy meeting the central bank would eventually slow the pace of interest rate hikes. That sparked a stock market rally, with some traders interpreting that comment to mean the Fed would soon ease up its aggressive stance.

• According to the minutes, officials agreed it would "likely become appropriate" to eventually dial back the pace of interest rate hikes as the central bank assesses the effects its policy is having on the economy and inflation.

• Speaking at the press conference, Powell left the door open to another "unusually large" interest rate increase at its upcoming meeting, though he said the decision will depend on incoming economic data.
• Most traders expect the Fed to raise interest rates by a half-percentage point — a bet that firmed up after the release of the minutes.

The bottom line: The minutes show Fed officials' commitment to bring inflation down and point out the downside of wavering on this stance. The Fed faced a "significant risk" that high inflation could become entrenched if the public started to doubt the Fed's commitment to adjusting interest rates, the minutes say.

• But, notably, many officials also pointed out the risk of overdoing interest rate hikes and crimp the economy more than necessary to bring inflation down.