Federal Reserve officials acknowledged the need for an interest rate hike if inflation does not ease, minutes from the central bank's July meeting showed Wednesday.
The Federal Open Market Committee voted 9-3 to maintain the policy rate at the 3.50% to 3.75% range for the fifth consecutive time at the July 28-29 meeting. The dissenters -- Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas -- called for a hike of 25 basis points.
"Many participants assessed that policy tightening would likely be necessary if inflation did not decline," according to the meeting minutes. "Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2%."
The decision came before the July employment report, which showed an unexpected drop in nonfarm payrolls. Annual consumer inflation slowed to a four-month low in July, Bureau of Labor Statistics said last week.
Markets are currently pricing in a 67% probability that the Fed will keep its benchmark rate steady on Sept. 16, compared with 42% a month ago. Those forecasting a 25-basis-point hike fell to 33% from 51%, according to the CME FedWatch tool.
Bets for continued Fed pause remained intact despite renewed upward pressure on oil prices amid uncertainty around the reopening of the crucial Strait of Hormuz. A 60-day ceasefire between the US and Iran expired Monday without a final deal.
"Various participants suggested that financial conditions had tightened over the intermeeting period and that this development was partly a reflection of strong economic growth and market expectations that the committee would adopt a more restrictive policy stance before long," the minutes showed.
Explaining their dissenting votes, the three regional officials argued that the Fed may need to pursue an aggressive tightening cycle to bring inflation down if it delays hiking interest rates.
"The minutes suggest that other (non-voting) participants are on the same page. And that there is a palpable hawkish sentiment brewing in the committee," Michael Gregory, deputy chief economist at BMO, said in a note. "But it will take inflation misbehaving to stir this sentiment further. Until then, the Fed will be holding indefinitely."
