Federal Reserve officials in June emphasized the need to fight inflation even if it means slowing an economy that has appeared on the brink of recession, according to meeting minutes. was announced on Wednesday.
Members said the July meeting is likely to also see another 50 or 75 basis point move. The basis point is one hundredth of a percentage point.
In discussing potential policy actions at upcoming meetings, participants continue to anticipate that a continued increase in the target range for the federal funds rate will be appropriate to achieve. achieve the goals of the Commission,” the minutes stated. “In particular, participants judged that a 50 or 75 basis point increase would likely be appropriate at the next meeting.”
As they raised the benchmark borrowing rate to three-quarters of a percentage point, central banks said the move was necessary to control a rise in the cost of living, which is at its highest level since 1981.
“Participants concurred that the economic outlook warrants a shift to a restrictive policy stance and they see the possibility that a more restrictive stance may be appropriate if mounting inflationary pressures persist.” , the document says.
They acknowledge that policy tightening may come at a cost.
“Participants recognized that policy consolidation could slow economic growth for a while, but they saw a return to 2% inflation as a key factor in achieving maximum employment.” on a sustainable basis,” the meeting summary stated.
The move to interest rates up 75 basis points in an unusual sequence in which policymakers appeared to have changed their mind at the last minute after saying for weeks that a 50 basis point move was almost certain.
Following data showing consumer prices sitting at 8.6% in 12 months and rising inflation expectations, the Federal Open Market Committee that sets rates has opted for a more stringent route.
The Fed’s Determination
Officials at the June 14-15 meeting commented that they needed to take the move to assure the market and the public that they were serious about fighting inflation.
“Many participants assessed that a significant risk facing the Commission is that high inflation could become entrenched if the public began to question the Commission’s resolve to adjust its stance. policy as guaranteed”, the minutes stated.
The document added that the moves, combined with communication regarding the policy stance, “will be essential in restoring price stability.”
However, this approach comes with a lot of uncertainty in the US economy.
Gross domestic product fell 1.6% in the first quarter and is trending 2.1% in the second quarter, according to an Atlanta-based Fed data tracking company. That would put the economy in a technical, albeit historically shallow, recession.
Fed officials at the meeting expressed optimism about the economy’s long-term path, although they sharply slashed their GDP forecast to 1.7 percent in 2022 from an earlier estimate of 2.8 percent in March.
They noted several reports of consumer sales slowing and businesses holding back investment due to rising costs. The war in Ukraine, ongoing supply chain bottlenecks, and the Covid outage in China were also cited as concerns.
Officials say inflation is much stronger than in the past, now predicting the price of personal consumption will increase 5.2% this year, compared with 4.3% previously estimated. 12-month PCE inflation was 6.3% in May.
The minutes noted that risks to the outlook were skewed lower for GDP and higher for inflation as tighter policy could slow growth. Anti-Inflation Priority Committee.
Officials noted that policy moves, which put the Fed’s benchmark funds rate in the 1.5%-1.75% range, have paid off, tightening financial conditions and reducing some measures. market-based inflation.
Two such measures, which compare inflation-indexed government bonds with Treasuries, have fallen to their lowest levels since the fall of 2021.
The minutes noted that after a series of rate hikes, the Fed would be in a position to gauge the success of the moves before deciding whether to proceed. They said “more restrictive policy” could be implemented if inflation does not fall.
Officials point to a series of hikes that will bring the fund rate to 3.4% this year, well above the long-term neutral rate of 2.5%. Futures markets are pricing in the possibility that the Fed will have to start cutting rates as soon as the summer of 2023.
