Fed's minutes reflect policymakers' concerns about softening inflation

The Federal Reserve released the minutes of the July 25-26 meeting, at which the Federal Open Market Committee members voted to maintain overnight interest rates between 1% and 1.25%, after hiking the rates by 25 basis points in the previous meeting for the second time this year. 

FOMC members pointed to the data available to the Committee since the July 13-14 meeting, as the labor market kept improving while economic activity expanded moderately, as labor gains slipped while remaining solid in average this year, and the unemployment rate fell. 

Members said household spending rose modestly, but consumption growth foundations remained strong, as fixed-rate investment stabilized, while inflation gauges in the last 12 month were near the bank's long-term 2% target, while still below that target when excluding energy and food prices.

Members asserted the Committee's commitment to boost job opportunities and stabilize prices, while pointing to the slow growth in the first quarter as probably transitory, as members still project gradual tightening of the monetary policy to allow the economy to expand moderately.  

Inflationary pressures are expected to steady at 2% in the medium term, while considering short-term risks as roughly balanced, as the Committee continues to monitor inflation gauges and global economic and financial developments closely. 

As of 07:33 GMT, the dollar index, measuring the greenback's performance against a basket of six major rivals, fell 0.04% to 93.82 from the opening of 93.85, with an intraday low at 93.75, and the highest since July 26 at 94.15.  

Similarly, members said that taking into consideration the labor conditions and current inflation rates, the Committee decided to increase interest raters to the range of 1 percent to 1.25%, while keeping the monetary policy accommodative, offering further support to the labor sector and nudging inflation firmly towards 2%. 

The Committee said it's assessing the current and projected economic conditions, with an eye towards achieving its targets of full employment and 2% inflation, while taking into consideration a wide group of data and economic information, including the labor market conditions and inflation indices. 

Members expect the economic conditions to develop in a way that allows for gradual tightening of the policy, with a path that ends just below the projected interest rates levels in the long term, while reaffirming that the actual path of short-term overnight interest rates depends on aforementioned economic projections and data.  

Otherwise, the Committee is carrying on its current policy of reinvesting its holdings of debt, mortgage-backed securities, and treasury bills and selling them in public auctions to trim them down from their current high levels in the long term, and in order to keep the financial conditions accommodative, while noting that the current balance sheet stands at $4.5 trillion. 

The FOMC expects to start normalizing the balance sheet this year to cut down on high levels of debt and mortgage-backed securities held by the Federal Reserve, as all the members agreed on the principles of normalizing the policy through the steps detailed in the additional document submitted alongside the usual bank statement in this meeting, while disagreeing on the timeline, as some prefer to start in two months, while others prefer to wait for the end of the year. 

The Committee wants to cut its monetary holdings gradually by reinvesting them through the open market system, while expecting the treasury bill sales to reach $6 billion at the start of the process, while rising to $30 billion a month in 12 months.

As for mortgage-backed security sales, they will start at $4 billion and advance to $20 billion a month after a year of the process. 

The Committee said that gradual cuts in the bank's debt holdings will trim down the reserve balance to way below recent years, while still remaining above the levels seen before the global financial crisis. 

Members are aiming to change the targeted range for federal money as the main way to change the policy, while standing to downgrade their interest rate target in case economic conditions deteriorated. 

They asserted that changing the targeted range for federal money is the main means to alter the monetary policy, while standing ready to reinvest their holdings in case the situation deteriorates enough to warrant that.  

Finally, the minutes showed how thew FOMC is ready to use all the tool in its power to decrease the size of the balance sheet and reform it, so that if the conditions for another bout of monetary expanding, the bank can rely on the traditional way of cutting interest rates.