Federal Reserve officials in June emphasized the need to fight inflation even if it means a slowing economy that already appears to be on the brink of recession, according to meeting minutes released on Wednesday.
Members said the July meeting would likely see another move of 50 or 75 basis points. A base point is one hundredth of one percentage point.
“When discussing potential policy actions at upcoming meetings, participants continued to expect that continued increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives,” the minutes stated. “In particular, participants felt that a 50 or 75 basis point increase would likely be appropriate at the next meeting.”
By raising benchmark borrowing rates by three-quarters of a percentage point, central bankers said the move was needed to control cost-of-living increases, which have reached their highest levels since 1981.
“Participants agreed that the economic outlook justified a transition to a restrictive policy stance, and recognized the possibility that a more restrictive stance would be appropriate if high inflation pressures persisted,” the document said.
They acknowledged that tightening the policy will come at a price.
The meeting summary stated that “participants have recognized that constancy of policies can slow down the pace of economic growth for some time, but felt that returning inflation to 2% is critical to maximizing employment opportunities on a sustainable basis.”
Transfer to Raising interest rates by 75 basis points It followed an unusual sequence in which policy makers appeared to have changed hands at the last minute after saying for weeks that a 50bp move was almost certain.
After data showing consumer prices running at a rate of 8.6% for 12 months and inflation expectations rising, the rate-setting Federal Open Market Committee chose the tougher path.
Fed design
Officials noted at the June 14-15 meeting that they need to take a step to reassure markets and the public that they are serious about fighting inflation.
The minutes stated that “many participants felt that the significant risk now facing the committee was that high inflation could take hold if the public began to question the committee’s determination to adjust the policy stance as required.”
The document added that the moves, along with communication regarding the policy stance, “would be necessary to restore price stability.”
However, this approach comes with the US economy on shaky ground.
First-quarter gross domestic product fell 1.6% and is on track to decline 2.1% in the second quarter, according to Atlanta Federal Reserve data. This would put the economy in a technical recession, albeit historically superficial.
Federal Reserve officials at the meeting expressed optimism about the longer-term path for the economy, even though they cut GDP forecasts sharply, to 1.7% in 2022 from a previous estimate of 2.8% in March.
They cited some reports of slowing consumer sales and companies retracting investments due to rising costs. The war in Ukraine, ongoing supply chain bottlenecks and the Covid shutdown in China were also cited as concerns.
Officials expected inflation to rise much more than before, and now expect prices for key personal consumption expenditures to rise 5.2% this year, compared to a previous estimate of 4.3%. The 12-month PCE inflation rate was 6.3% in May.
The minutes noted that risks to the outlook tend to be lower for GDP and higher for inflation as policy tightening could slow growth. The committee gave priority to combating inflation.
Officials noted that policy moves, which put the federal funds rate in the 1.5%-1.75% range, have already yielded results, tightening financial conditions and reducing some inflation measures in the market.
Two of those measures, which compare inflation-linked government bonds with Treasuries, have moved to their lowest levels since the fall of 2021.
The minutes noted that after a series of rate increases, the Fed would be in a good position to assess the success of the moves before deciding whether to continue. They said a “more restrictive policy” could be implemented if inflation failed to fall.
Officials pointed to a series of increases that will raise the funds rate to 3.4% this year, above the long-term neutral rate of 2.5%. Futures markets are pricing in the possibility that the Fed will have to start cutting interest rates as soon as the summer of 2023.
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