Federal Reserve officials in June stressed the need to fight inflation, even if that means slowing an economy that already appears on the brink of recession, according to meeting minutes released Wednesday.
Members said the July meeting was also likely to lead to another move of 50 or 75 basis points. A basis point is one hundredth of 1 percentage point.
“In discussing potential policy actions at upcoming meetings, participants continued to expect that current 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 judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting.”
In raising benchmark lending rates by three-quarters of a percentage point, central bankers said the move was needed to control rising living costs, which are at their highest levels since 1981.
“Participants agreed that the economic outlook calls for a shift to restrictive policy and acknowledged the possibility that an even more restrictive stance may be appropriate if high inflationary pressures persist,” the document said.
They acknowledged that tightening policy would likely come with a price.
“Participants acknowledged that policy tightening could slow the pace of economic growth for some time, but saw inflation returning to 2 percent as critical to achieving maximum employment on a sustainable basis,” the meeting summary said.
The move to raise interest rates by 75 basis points followed an unusual sequence in which policymakers appeared to change their minds at the last minute after saying for weeks that a move of 50 basis points was all but certain.
After data showed consumer prices moving at an 8.6% 12-month pace and inflation expectations rising, the Federal Open Market Committee, the rate-setter, took the tougher path.
The determination of the Fed
Officials at the June 14-15 meeting noted that they needed to make the move to reassure markets and the public that they were serious about fighting inflation.
“Many participants felt that a significant risk now facing the committee is that elevated inflation could take hold if the public begins to question the committee’s resolve to adjust the policy stance as warranted,” the report said. the protocol.
The paper added that the moves, coupled with communication about the policy stance, “will be essential to restore price stability.”
However, the approach comes with the US economy on shaky ground.
Gross domestic product fell 1.6 percent in the first quarter and is on track to contract 2.1 percent in the second quarter, according to data from the Atlanta Fed. This would put the economy into a technical, albeit historically shallow, recession.
Fed officials at the meeting expressed optimism about the economy’s longer-term path, although they sharply lowered their GDP forecast to 1.7 percent in 2022 from a previous estimate of 2.8 percent in March. They noted some reports of slowing consumer sales and slowing business investment due to rising costs. The war in Ukraine, continued supply chain difficulties and the Covid lockdown in China were also cited as concerns.
Officials saw a much bigger jump in inflation than before, now expecting core personal consumer spending prices to jump 5.2 percent this year, up from a previous estimate of 4.3 percent. 12-month PCE inflation was 6.3% in May.
The minutes note that risks to the outlook are skewed lower for GDP and higher for inflation as tighter policies could dampen growth. The Commission prioritized the fight against inflation.
Officials noted that policy actions that put the Fed’s benchmark interest rate in a range of 1.5%-1.75% have already had results, tightening financial conditions and lowering some market-based measures of inflation.
Two such measures, which compare inflation-indexed government bonds to Treasuries, moved to their lowest levels since fall 2021.
The minutes noted that after a string of rate hikes, the Fed would be in a good position to assess the success of the moves before deciding whether to proceed. They said “tighter policy” could be implemented if inflation fails to fall.
Officials pointed to a series of hikes that would bring the interest rate to 3.4 percent this year, above the long-term neutral rate of 2.5 percent. Futures markets are pricing in the possibility that the Fed will have to start cutting rates as early as the summer of 2023.
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