Updated at 4:20 pm EST
The Federal Reserve is likely to use incoming data, as opposed to a preferred policy path, to determine the size of future rate hikes, minutes from the central bank's July policy meeting indicated Wednesday, although inflation was described as 'uncomfortably high' by Chairman Jerome Powell and his colleagues.
The minutes indicated that the pace of rate hikes would likely slow over the coming months, but agreed at the time that there was "little evidence" of an inflation slowdown following two consecutive 75 basis point rate hikes, the last on July 27, that lifted the benchmark Fed Funds rate to between 2.25% and 2.5%.
Since that decision, headline CPI has slowed notably, to a pace of 8.5% in July, while retail sales have improved as a result of tumbling gas prices and consumer confidence is on the rise on the back of robust jobs. The Fed will see two releases of PCE Price index data, its preferred inflation gauge, an August jobs report and another monthly CPI reading prior to its next interest rate decision on September 21.
"Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2%," the minutes read. "Participants concurred that, in expeditiously raising the policy rate, the Committee was acting with resolve to lower inflation to 2%and anchor inflation expectations at levels consistent with that longer-run goal."
U.S. stocks pared some earlier declines following release of the minutes at 2:00 pm Eastern time, with the Dow Jones Industrial Average closing 170 points lower on the session and the S&P 500 down 31 points.
The CME Group's FedWatch tool now suggests a 47.5% chance of another 75 basis point hike in September, with bets on a smaller 50 basis point move at 52.5%, essentially near the same levels in the immediate aftermath of the July hike but around 10 percentage points higher than a week ago.
"The Fed minutes once again show that controlling inflation is its top priority," said Chris Larkin, managing director at E*TRADE from Morgan Stanley. "While it may not be as dovish as some investors hoped to see, there are indications that a slowdown in hikes is in the not-so-distant future."
"Keep in the mind that the minutes are from before July’s big payroll beat and data that showed inflation slowed," he added. "Data over the next month may determine how long the rally can extend as investors try to get a sense of what the Fed will decide in September."
All that said, the U.S. Treasury curve remains steeply inverted -- a condition that has preceded nearly every recession for the past 25 years -- even as the Atlanta Fed's GDPNow forecasting tool suggests the economy is growing at a 2.5% clip.
Benchmark 10-year Treasury note yields, meanwhile, were little-changed at 2.897% while 2-year notes were pegged at 3.312%.